Course Outline: PRINCIPLES OF FINANCE- ACF 261 Samia S. Khokhar

2 Aims & Objectives The course aims to provide a pedagogical introduction to the area of financial management The level of difficulty of the course material is elementary to medium The core (focus) areas to be covered in the course are: financial statement analysis, valuation, working capital management and financial markets The course will provide theoretical knowledge, while consistently linking the theoretical issues to the “real-world” (i.e. practical) cases The objective of the course is to enable students to develop clear understanding of the (corporate) financial issues

3 Course Information Instructor: Samia S. Khokhar Recommended course prior to “Principles of Finance”: Financial Accounting-I Sessions: 20 (interactive) sessions of 100 minutes each Class Timings: Mondays and Wednesdays, 3.30pm to 5.10pm Venue: A8

4 Course Information The course is divided into four modules Introduction to Financial Management Valuation Financing Financial Markets Grading Class Contribution 5% Quizzes and Problem Solving Exercises 25% 6 quizzes and 2 problem solving exercises Mid-term Examination 30% Final Examination 40%

5 Reading Material Textbook Block, S. B. and G. A. Hirt, Foundations of Financial Management, Tenth Edition, McGraw-Hill Irwin. (B&H) Reference Book Brealey R.A. and S. C. Myers, Principles of Corporate Finance, Sixth Edition, McGraw-Hill Irwin. (B&M) Financial Newspapers Business Recorder Financial Times (FT.com) The Wall Street Journal (WSJ.com) Further Supplementary Material Book chapters, newspaper / journal / magazine articles, etc. may be assigned as additional readings during the period of the course

6 Sessions 1 – 3 Session 1: The Framework of Financial Management In this session we will discuss the process of financial management. We will also examine the financial managers’ activities, as well as distribution of their time spent on each activity. Other topics, such as agency problem, business ethics, stock price/value maximization, signalling theory, will also be considered. Reading: B&H, Chapter 1 Session 2: Understanding of Financial Statements and Reports For a financial manager it is absolutely essential to have full command over the understanding of financial statements – the balance sheet, the income statement and the cash flow statement. Note that “Notes” in the financial reports are also an integral part of financial statements and must be scrutinized carefully. During this session a review of financial statements will be presented. Reading: B&H, Chapter 2 Session 3: Financial Analysis Financial analysis is vital to financial managers. The scope of financial analysis depends on its purpose, which may range from a total analysis of a firm’s strengths and weaknesses to a relatively simple analysis of its short-term liquidity. In this session we will concentrate on ways of “reading between the financial statements”. Reading: B&H, Chapter 3

7 Sessions 4 – 7 Session 4: Financial Forecasting In this session we will look into developing pro forma financial statements. These refer to forecasted financial statements, which are essential for corporate (future) planning and for securing finances required to successfully operate the business. We will discuss various methods for forecasting sales, cost of goods sold (COGS) and other variables. Reading: B&H, Chapter 4 Sessions 5–6: Short Term Financing In this session we will discuss working capital policy and its management. This involves financing decision relating to current assets and effectively managing current liabilities. We will also examine how to evaluate firm’s liquidity management. Liquidity management involves the planned acquisition and use of liquid resources over time to meet cash obligation as they become due. The sources of short-term financing will also be identified Reading: B&H, Chapters 6-8 Session 7: Risk and Return A financial manager acting on behalf of the firm’s shareholders should not make an investment decision solely on the basis of expected return. Financial managers must also assess the riskiness of an investment. Hence, risk and return analysis is an important area for a financial manager. In this session we will examine topics like probability distributions and measures of risk. Here we will also discuss one of the pillars of modern finance, namely capital market efficiency Reading: B&H, Chapter 14 (pages )

8 Sessions 8 – 11 Sessions 8–9: Time Value of Money During this session we will get acquainted with the processes of discounting and compounding. We will briefly touch upon the problem of determining the “right” discount rate, but will go into greater details during the next session. Reading: B&H, Chapter 9 Session 10: Mid-term Examination Session 11: Cost of Capital / Financing Cost In this session we will examine costs attached to various types of financing. In developing the firm’s overall cost of capital, we first identify and then determine the cost of each component, and then we combine the components costs to obtain the total cost of capital known as Weighted Average Cost of Capital (WACC). Mainly we will discuss cost of equity capital and cost of debt financing. Reading: B&H, Chapter 11

9 Sessions 12 – 15 Sessions 12 & 13: Stock & Bond Valuation In this session we will examine various models for valuing common stocks. We will look into valuing dividend and non-dividend paying stocks. Here we will again deal with the “correct” cost of equity to be used in the valuation. In this session two main approaches – full valuation approach and duration / convexity approach – of valuing bonds will also be covered. We will concentrate on the full valuation approach, which is a relatively straightforward method for valuing bonds. Reading: B&H, Chapter 10 Session 14: Capital Budgeting This session will utilize the knowledge gained in sessions 7-11 to enable us to evaluate various projects. We will discuss various capital budgeting techniques, such as Net Present Value, Internal Rate of Return, Pay Back Period among others. We will also discuss risk analysis in capital budgeting, as well as the characteristic of the optimal capital budget. Reading: B&H, Chapter 12 Session 15: Capital Structure Policy One of the perplexing questions facing financial managers is, how much debt financing, as opposed to equity financing should a firm use? We will discuss some theoretical issues attached to the capital structure of a firm. The Modigliani-Miller models will be briefly introduced, but will be discussed in greater details in the next course. Readings: Handouts to be given

10 Sessions 16 – 18 Session 16: Dividend Policy In this session, we will discuss the dividend policy, which is the decision to payout earnings or to retain and reinvest them in the firm. We will discuss whether shareholders prefer cash dividends or capital gains. We will examine three well known theories of investor preference: i) The dividend irrelevance theory ii) The “bird-in-the- hand” theory iii) The tax differential theory Reading: B&H, Chapter 18 Session 17: Financing through Common and Preferred Stocks When a firm’s requirements for additional equity cannot be met by retained earnings, the company must sell new stock. In this session we will examine: the market for common stock, the decision to list a stock on an exchange and procedures for selling new stock. We will also discuss the characteristic of preferred stock Reading: B&H, Chapter 17 Session 18: Long term Debt and Other Related Instruments In this session we will discuss various issues linked to long-term debt financing. We will examine the implications of bond rating, as well as the role of rating agencies. Other instruments, such as, leases and hybrid debt will also be covered. A brief introduction to financial distress / bankruptcy and liquidation / reorganization will also be presented Reading: B&H, Chapter 16

11 Sessions 19 & 20 Session 19: Investment Banks and Other Financial Institutions In this session we will discuss the role of various financial institutions. In particular, we will discuss the role and activities of Investment banks. Investment banks are financial advisors to the corporate world and governments to raise finance in the capital markets. Investment banks also advise corporations in mergers, de-mergers, management buyouts and leverage buyouts Reading: B&H, Chapters 14 (pages 407 – 419) and 15 Session 20: Corporate Control and Governance Here we will discuss the implications of corporate control and the hot topic of “Corporate Governance”. Under the umbrella of corporate control we will examine mergers and acquisitions, leverage and management buyouts. Corporate governance has received much needed publicity in the wake of “Enron Saga”. We will also discuss the characteristics of effective corporate governance systems Readings: B&H, Chapter 20; Other hand outs to be given