Lahore University of Management Sciences

FINN 100 Principles of Finance

Spring Semester 2014
Instructor Room No. Office Hours Email Telephone Secretary TA Section One TA Section One TA Office Hours Course URL (if any) Muhammad Bashar ullah/Arslan Shahid Butt/Hamza Ghaffar SDSB 215 TBA [email protected], [email protected], [email protected] +92 42 3 560 8080 . Cell: +92 300 4013446 Mohammad Saleem Khan Ext To be announced To be announced To be announced Suraj.lums.edu.pk

COURSE BASICS
Credit Hours Lecture(s) Recitation/Lab (per week) Tutorial (per week) 4 Number of Lectures Per Week Number of Lectures Per Week Number of Lectures) Per Week 2/week Once / 2 Weeks Once / 2 Weeks Duration Duration Duration 110 Minutes 90 Minutes 90 Minutes

COURSE DISTRIBUTION
Core Elective Open for Student Category Close for Student Category 4 Sections (Arslan Shahid Butt & Bashar Ullah) 2 Sections (Arslan Shahid Butt & Humza Ghaffar) All Who have not done ACCT 100

COURSE DESCRIPTION
This is an introductory course in Finance and the first in a series of required Finance core courses for the B.Sc. Accounting & Finance degree. This course together with the next course, Intermediate Finance, completes an introduction to modern theory of Corporate Finance. The final required course in the sequence, Applied Corporate Finance, introduces advanced topics and explores certain topics in depth. Firms invest in real assets such as plant and equipment (the Investment decision) and raise money via personal funds, stocks, bonds or bank loans (the Financing decision). Broadly speaking, Financial Management is about how this Investment and Financing decisions should be made. This course explores the first part of Financial Management and introduces the framework, tools and techniques for making Investment decisions. Specifically, we will cover Valuation, Capital Budgeting, Modern Portfolio Theory and Equilibrium Risk-Return Relationship.

COURSE PREREQUISITE(S)

Basic Knowledge of Accounting. ACCT 100.is a pre requisite

COURSE OBJECTIVES
To equip the students with the fundamentals of investing activities of corporate finance. To introduce the concept of Time Value of Money(TVM) and its applications To introduce the concept of Risk and Return To introduce the basics of Capital Budgeting and techniques of evaluation To help students learn about Cost of capital and Capital structure.

LEARNING OUTCOMES

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To revisit and review and relate the basic concepts of Accounting and Economics. The basic knowledge of the environments of managerial finance. Understanding the TVM and its applications. To apply TVM for valuation of Stocks and Bonds. Understanding of operating cash flow, capital budgeting techniques and associated stand alone risks Understanding of cost of capital and the calculations involved. Introduction to the capital structure

GRADING BREAKUP AND POLICY CLASS ROOM POLICY

ATTENDANCE: 10%.

An overall absence of 10 minutes or more, in a session shall be deemed as an absence for the full session. Students are noted for late coming and early leaving or unnecessarily leaving the class during the class hours.

Class Participation: 5%. All the students are expected to participate in the class discussions. In order to ensure a positive learning climate, All ethical norms shall be observed in the class and examinations. Any attempt to disturb a classmate, engage in talking or whispering during the class or to vitiate the overall class atmosphere may result in negative marks in class participation. Turn Off your Cell phones or put them on Silent mode. Use of Smartphone, internet, on line chatting or use of technology related gadgetry of any kind is not allowed.

only intelligent and contributory observation and discussions shall be rewarded.

POLICY REGARDING EXAMINAIONS QUIZZES AND OTHER GRADING INSTRUMENTS.

There is a zero tolerance policy ( ZTP) for any undesirable behavior or undeserving attempt to improve your grades during the quizzes and examinations. Such action can result in cancelling your examination paper. It may also result in disciplinary actions by Disciplinary Committee. Please carefully weigh in your actions costs and benefits and always show an ethical and moral deportment and behavior always. Quiz(s): 20%. th th, th rd. There shall be total of 5 all announced Quizzes (On beginning of 7 , 10 13th, 19 & 23 Sessions) The best four shall be counted. There shall be no makeup quizzes. No sharing of calculators, or any help sheet be allowed, whatsoever

The examination could be mix of MCQ short exercise and short explanations. 20% There is a zero tolerance for any undesirable behavior to undeserving attempt to improve your grades during the quizzes and examinations.
FINAL GROUP PROJECT:20 %

Midterm Examination: 20%

(A group project from a group size of 6-8 persons, depending on the size of the class).

A report on comprehensive and critical analysis of a selected company shall be prepared and presented by each group. The th th groups shall be finalized in the 4 session. The outline of the report shall be presented by 8 session for approval. The report th must be submitted by 24 session. The report shall not exceed 15 pages 1 space 12 Times New Roman excluding title index and bibliography etc. (Each group shall select a company or business for the detailed analysis. Group members shall be asked to remain abreast with the developments taking place in the marketplace, through financial press. The impact of current developments taking

place, which are pertinent to their selection of study, shall be monitored and compiled by the group. The group is expected to apprise the class with their observations through class participation.
Assignment(s): Short Assignments and Spreadsheet related exercises. Home Work: All assignments as per the guide line of the project report (Please see annexure 1) FINAL EXAMINATION: 25%.

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The examination could be mix of MCQ short exercise and short explanations. Students may also expect a question or two from the assigned report or a case or a situation analysis. 25%

Examination Detail
Midterm Exam Combined Duration: 1 Hours Preferred Date: Saturday or Sunday Exam Specifications: Close Book, Close Notes, TVM Tables and Calculators allowed. No calculators sharing in examinations shall be allowed, Whatsoever. Combined all sections Duration: 2 Hours Preferred Date: Saturday or Sunday Exam Specifications: Close Book, Close Notes, TVM Tables and Calculators allowed. No calculators sharing in examinations shall be allowed, Whatsoever.

Final Exam

TEXTBOOK(S)/SUPPLEMENTARY READINGS
Required Text: Principles of Managerial Finance By Lawrence J Gitman 12 edition To stay abreast with the market a regular reading of financial press is essential to understanding and appreciation of the body of knowledge and the subject matter of the course. Reading of other introductory text books on the subject is encouraged to find out the other writers point of view about the pedagogy.
th

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COURSE OVERVIEW

WEEK/ LECTURE/ MODULE

TOPICS
1.1- Finance and Business: Introduction to the course; What is Finance; Why Study Managerial Finance. 1.2- Managerial Finance functions: organization of Managerial Finance function; relationships to economics and accounting. 1.3- Goals of the Firm: Maximizing Profit or wealth? .corporate governance and business ethics 2.1- Stockholders Report: Four key Financial Statements and notes of Financial reports. 2.2- Using Financial Ratios: user of financial ratios; Types of Ratio comparison; Cautions about using Financial Ratios Analysis. Such as Liquidity; Activity; Debt; Profitability and-Market ratios 2.8- A Complete Ratio Analysis: Summarizing all ratio analysis; DuPont System of Analysis. exercises 3.1- Analyzing the Firms cash Flow:3.2- Financial Planning process:3.3- Cash planning and Cash Budgets:3.4- Profit Planning Pro forma Statements:3.5- Pro forma Income statements:3.6- Pro forma Balance sheet:3.7- Evaluation of Pro forma Statements:1.4- Financial Institutions and Markets: Financial Institutions; Money & capital Markets. Scope and Areas of finance and how it is related to other areas of business. 1.5-Business Taxes: Ordinary Income and Capital gain taxes. 4.1:-The role of the TVM in Finance 4.2- Single Amount & Review questions 4.3- Annuities & Perpetuities.

RECOMMENDED READINGS

OBJECTIVES /APPLICATION

Week 1, Session 1.

Readings: Chapter 1 of LG 1.Role and Environments of Managerial Finance.

Session 1 Introduction to the course Structure for projects.)

(Invitation to form groups

Week 1, Session 2

Readings: Chapter 2. Reading Financial Statement analysis

Review of basic accounting concept. Revisit Ratio analysis and discuss its relevance to project.

Finalization of groups Forming,

Readings: Chapter 2. Financial Statement analysis Readings: Chapter 3. Cash Flow and Financial Planning Warm up Exercises Integrative case 1 Track software Inc. Readings: Chapter 1 Role and Environments of Managerial Finance. Role and Environments of Managerial Finance Class notes Focus on Practice Berkshire Hathaway pp28 Chapter, 4. Time Value of Money

Week 2, Session 3

Review of basic accounting concept. Revisit Ratio analysis and discuss its relevance to project.
Revisit the Preparation of Cash Flow From a finance managers perspective Revisit the Preparation of Cash Flow From a finance managers perspective

Week 2, Session 4

Week 3, Session 5

Week 3, Session 6

Importance of Spreadsheet and financial modeling on Excel to be emphasized.

Week 4, Session 7 Week 4, Session 8

Discussing the roll of Time Value in Finance, The use of computational tools, and the basic patterns of cash flow.

Week 5, Session 9 Week 5, Session 10 Week 6, Session 11 Week 6, Session 12 Week 7, Session 13 Week 7, Session 14 Week 8, Session 15 Week 8, Session 16

4.4- Mixed Stream 4.5-Compounding Interest More Frequently Than annually 4.6- Special Applications of Time Value 5.1:- Risk and return Fundamentals 5.2:- risk of Single assets 5.3:- Risk of a Portfolio:5.4:- Risk and Return: The Capital assets Pricing Model (CAPM): 6.1:- Interest rates and required Return: 6.2:- Corporate Bonds: 6.3:- Valuation fundamentals: 6.4:- Bond Valuation.: 7.1:- Difference between debt and Equity capital: 7.2:- Common and Preferred Stock 7.3:- Common Stock Valuation: 7.4:-Decision Making and Common Stock

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Chapter 5. Risk and Return

Chapter 6. Interest rates and Bond Valuation

Chapter 7. Stock Valuation

Understanding the meaning and fundamentals of risk, return, and risk preferences. Discussing the measurement of return and standard deviation for a portfolio. Describe interest rate fundamentals, the term structure of interest rules and risk premiums. Understanding the key inputs and basic model used in the valuation process. To Differentiate between debt and equity capital. Discuss the rights, characteristics, and features of both common and preferred stocks.

Mid Term Examination

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WEEK/ LECTURE/ MODULE
Week 9, Session 17

TOPICS 8.1:- Capital budgeting decision Process: 8.2:- Relevant cash Flow: 8.3:- Finding the Initial Investments 8.4:- Finding the Operating Cash Flow: 8.5:- Finding the Terminal Cash Flow: 8.6:- Summarizing the relevant Cash Flow 9.1:- Overview of Capital Budgeting: 9.2:- Payback Period: 9.3:- Net Present Value 9.4:- Internal rate of Return: 9.5:- Comparing NPV and IRR Techniques 10.1:- Introduction to Risk in Capital Budgeting. 10.2:- Behavioral Approaches for Dealing with Risk 10.3:- International Risk Considerations 10.4:- Risk Adjusted Discount Rates(RADRs): 10.5:- Capital Budgeting Refinements 11.1:- Overview of Cost of capital 11.2:- Cost of Long Term Debt 11.3:-Cost of Preferred stock 11.4:- Cost of Common Stock 11.5:- Weighted average cost of Capital 11.6:- Weighted Marginal Cost of Capital 12.1:- Breakeven Analysis, Operating Leverage, Financial Leverage and Total Leverage. 12.2: Firms Capital Structure 12.3:-EBIT EPS Approach

RECOMMENDED READINGS Chapter 8. Capital Budgeting Cash Flows Focus on Ethics Non Financial consideration in Project Selection pp440

OBJECTIVES/APPLICATION Understanding the key motives for capital expenditure and the steps in the capital budgeting process. Define basic capital budgeting terminologies Understanding the rule of capital budgeting techniques in the capital budgeting process. Use net present value profiles to compare NPV and IRR in techniques To understand the importance of recognizing risk in the analysis of capital budgeting projects. To discuss risk and cash inflows, scenario analysis, and simulation as behavioral approaches for dealing with risk. To understand the key assumptions, the basic concept, and the specific sources of capital associated with the cost of capital. To understand operating, financial, and total leverage and the relationships among them. To discuss the EBIT-EPS approach to capital structure.

Week 9, Session 18

Week 10, Session 19 Week 10, Session 20

Chapter 9. Capital Budgeting Techniques

Week 11, Session 21

Week 11, Session 22 Week 12, Session 23 Week 12, Session 24

Chapter 10. Risk and refinements in Capital budgeting Focus on Ethics: Environment Compliance: Honesty is the best policy

Chapter 11. The cost of Capital Focus on Ethics Non Financial consideration in Project Selection pp440

Week 13, Session 25

Chapter 12. Leverage and Capital Structure

PRESENTATIONS
Session 26 Session 27 Session 28

Week 13, Day 26, Presentation by Groups, 1, 2 & 3 Week 14, Day 27, Presentation by Groups, 4, 5 & 6 Week 14, Day 28, Presentation by Groups, 7, 8 & 9

FINAL EXAMINATION

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Annexure 1 GUIDELINES OF PROJECT REPORT Project for Semester (Spring 2013), Principles of Finance (Finn100) Mohammad Basharullah

Introduction or Executive Summery The proposed business Factor Affecting Business Macro Factors affecting business Industry Analysis Financials Planning and Forecasting Sales Forecasting Sales Drivers and Assumptions Regression analysis and forecasting Base Case Sales Projection Performa Financial Reports Performa Income statement Pro forma Balance Sheet Capital Requirement and projected Statement of Owners Equity Projected Cash Flow Statement Cash Flow Analysis for Project Evaluation NPV using KIBOR+ IRR, Or MIRR Payback and Discounted Payback Period Stand Alone Risk Analysis and What if Analysis Sensitivity analysis Scenario Analysis Break Even Analysis Operating and Financial Leverage Calculating Cost of Capital Based On Capital Structure Recalculate the entire project on calculated Hurdle Rate

Conclusion Finding and Final Summary (Some useful hints and guidelines for financial model can be taken from http://www.smeda.org/business-development/pre-feasibility-studies.html) http://www.nestle.pk/asset-library/documents/financial_reports/nestle_ar_2012.pdf http://www.unilever.pk/Images/Unilever%20Pakistan%20Limited%20Financial%20Result%20Q2%202013_tcm96-370009.pdf http://www.unilever.pk/ http://www.unilever.pk/Images/Unilever%20Pakistan%20Sustainability%20Report%202012_tcm96-355078.pdf http://engro.com/wp-content/uploads/2012/03/F-E-Corp%20AR%202011.pdf http://www.pg.com/en_US/sustainability/reports.shtml http://www.pg.com/en_US/downloads/sustainability/reports/PG_2012_Sustainability_Overview.pdf http://www.pg.com/en_US/downloads/investors/annual_reports/2013/2013_AnnualReport_proxy.pdf http://www.pg.com/en_US/investors/index.shtml http://www.pg.com/annualreport2012/files/PG_2012_AnnualReport.pdf http://www.kse.com.pk/