Corporate Finance

Unit II (5 weeks)

Strategic Investment Decisions: Capital Budgeting -; Nature and meaning of capital budgeting; Principles and Process; Estimation of relevant cash flows and terminal value; Evaluation techniques – Payback period, Accounting Rate of Return, Net Present Value, Internal Rate of Return & MIRR, Net Terminal Value, Profitably Index Method, Payback Period, NPV vs. IRR, Risk analysis in Capital Budgeting -Sensitivity analysis, Certainty Equivalent Approach, Calculation of RADR, Real options, excel functions of capital budgeting techniques.

Cost of Capital: Meaning and concept, Explicit and Implicit costs; Measurement of cost of capital- Cost of debt; Cost of perpetual debt; Cost of Equity Share; Cost of Preference Share; Cost of Retained Earning; Computation of over-all cost of capital based on Historical and Market weights (WACC); Adjusting cost of capital for risk.

References:

Prasanna Chandra, “Financial Management: Theory and Practice”, 9th ed, Mc Graw Hill. [Chapters – 11, 12, 13, 14, 15]

Horne, James C V. and John M. Wachowicz, Jr. “Fundamentals of Financial Management. 13th ed; FT Prentice Hall, Pearson Education. [Chapters – 12, 13, 14 & 15]

Unit III (3 weeks)

Strategic Financing Decisions- Capital Structure, Theories and Value of the firm – Net Income approach, Net Operating Income approach, Traditional approach, Modigliani Miller (MM) model, HAMADA model; Determining the optimal capital structure, Checklist for capital structure decisions, Costs of bankruptcy and Financial distress, Trade off models, Pecking Order Theory. Leverage analysis and EBIT-EPS Analysis: Concept of leverage, Types of leverage: Operating leverage, Financial leverage, Combined leverage; EBIT-EPS Analysis, Guidelines for capital structure planning, Link between capital structure and capital budgeting.

Dividend Decisions: Factors determining dividend policy, Theories of dividend- Gordon model, Walter model, MM Hypothesis, Signalling Theory, Forms of dividend – Cash dividend, Bonus shares, Stock split, Dividend policies in practice, Patterns observed in payout policies worldwide

References:

Prasanna Chandra, “Financial Management: Theory and Practice”, 9th ed, Mc Graw Hill. [Chapters – 19, 20, 21 &22]

Horne, James C V. and John M. Wachowicz, Jr. “Fundamentals of Financial Management. 13th ed; FT Prentice Hall, Pearson Education. [Chapters – 16, 17 & 18]

Unit IV (2 weeks)

Working Capital Management: Management of Cash – Preparation of Cash Budgets (Receipts and Payment Method only); Cash management technique (Lock box, concentration banking), Receivables Management – Objectives; Credit Policy, Cash Discount, Debtors Outstanding and Ageing Analysis; Costs – Collection Cost, Capital Cost, Default Cost, Delinquency Cost, Inventory Management (Very Briefly) – ABC Analysis; Minimum Level; Maximum Level; Reorder Level; Safety Stock; EOQ (Basic Model), Determination of Working Capital. Determining financing mix of working capital.

References:

Prasanna Chandra, “Financial Management: Theory and Practice”, 9th ed, Mc Graw Hill. [Chapters – 23, 24, 25, 26, 27 & 28]

Horne, James C V. and John M. Wachowicz, Jr. “Fundamentals of Financial Management. 13th ed; FT Prentice Hall, Pearson Education. [Chapters – 8, 9, 10 & 11]