Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

Capital Budgeting and Financial Planning Module Handbook

Instructor:Jibran Sheikh Faculty of Business Ad inistration !epart ent of Manage ent Sciences

Department of Management Science ! C""# " lamabad

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Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

Contents

Capital Budgeting and Financial Planning..................................................................................................1 Module Handbook.......................................................................................................................................1 Contents...................................................................................................................................................2 Contacting the Module Instructor:...........................................................................................................3 Rationale Including i!s:.......................................................................................................................3 "tudents should ha#e s$ccess%ull$ co!pleted the course on Corporate Finance& and Financial Manage!ent and Polic$ be%ore taking the this course. ..........................................................................3 'eaching and (earning "trategies:...........................................................................................................3 (earning outco!es:..................................................................................................................................3 ssess!ent "che!e.................................................................................................................................) Reading Materials....................................................................................................................................) Course Re*uire!ents and +,pectations:.................................................................................................) Pro-ect.Case "tudies................................................................................................................................./ cade!ic 0ishonest$:............................................................................................................................./ Course 1utline:........................................................................................................................................2

Department of Management Science ! C""# " lamabad

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Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

Course Introduction and "#er#ie$ Capital budgeting is the study of investment decisions undertaken by the corporations. It revolves around understanding how corporations allocate funds among alternative investment opportunities. The course is concerned with the valuation of corporate assets (projects/investments). It is based on the theory and methods developed in prere uisite units! particularly Corporate "inance and "inancial #anagement $ %olicy. There is considerable emphasis on valuation techni ues including advanced techni ues such as &%' and real options! project risk analysis and financial planning. This is a ( credit hour course! comprising ( hours of teaching per week. Contacting the Module Instructor: )ou can contact your module instructor in the following ways* +mail* #eeting* jibransheikh,comsats.edu.pk -y appointment only or during the office hours (arranged prior to coming)

%ationale Including Ai s: Capital budgeting is the study of investment decisions undertaken by the corporations. It revolves around understanding how corporations allocate funds among alternative investment opportunities. The ultimate objective of any capital budgeting decision is to ma.imi/e the market value of the firm0s common stocks! and thereby! the wealth of its shareholders. #ain aim of this course is to cover basic tools used in capital budgeting decisions. &t the end of the course! the students should be able to understand and apply the following methods of capital budgeting* 1%'! I22! %ayback %eriod Cash "low estimation for %roject &ppraisal 2isk &nalysis of Capital -udgeting %rojects 2eal 3ptions Prere&uisites* 4tudents should have syccessfully completed the course on Corporate "inance! and "inancial #anagement and %olicy before taking the this course. 'eaching and (earning Strategies: 5ectures will introduce the ideas and the course materials. Class discussions will provide in6depth analysis of the concpets and clarify any ambiguities. %articipation from the students is encouraged. &ssignemnts and activities will keep the students engaged in the learning process and enhance self learning. %roject/Case 4tudy will provide the students with an e.tended framework to apply the concepts learned in the class to real world situations thus transforming the concepts and ideas into skills. %resentations will burnish students0 presentation! communication and public speaking skills and give them self confidence. +.ams and 7ui//es will stimulate the learning and provide an objective assessment of the knowledge gained after taking the course. +.ams will also help to identify high achivers thus enabling to reward their hardwork.

(earning outco es: 8pon successful completion of the course! the students will be able to*
Department of Management Science ! C""# " lamabad ' of %

Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

+stimate any project9s Cash inflows $ outflows &ssess riskiness of these Cash "lows using different risk analysis techni ues :etermine appropriate discount rate (cost of capital) &pply an Investment &ppraisal #ethod/Techni ue (1%'! I22! #I22! %-% etc.) &ccept (or reject) based on acceptance criteria 8nderstand the basics of "inancial %lanning 8se +.cel for financial planning and %roject &ppraisal

My 'eaching Philosophy It is important to me that each of you is successful in this course in terms of learning and in terms of grades. ;owever it will depend on your attitude) hard $ork and desire to learn and e*cel+ I do not belie#e in spoon feeding and $ill e*pect you to take initiati#e+ Co e prepared in the class) go through assigned readings and co plete all the tasks and assign ents gi#en to you+ I $ill try to pro#ide a conduci#e to learning en#iron ent in the classroo + I encourage interaction and discussions+ :o not hesitate to ask or to contact me if you have a uestion. :on9t wait until the last minute to work on assignments or prepare for the e.ams. :o not procrastinate. %rocrastination in semester system is a sure way to failure. +.ams and &ssignments will be due before you think they will be. Assess ent Sche e Courseworks $ Class participation #id6term e.amination 8nseen three hour e.amintion %eading Materials Core Text: @. 4elected Chapters from "I1&1CI&5 #&1&A+#+1T T;+32) &1: %2&CTIC+ by -righam and +hrhardt! @<th +dition <. 'aluation measuring and managing the value of Company tom Copeland! Tim Biller and Cack #urrin (rd +dition ,ebsites and -e$spapers: (Keep an eye on corporate announcements) <=> <=> =?>

3. -usiness section of daily D:awn0 and :awn -usiness 2eview available at (www.dawn.com)
E. -usiness 2ecorder (www.br.com.pk) Calculators) co puters and internet access: & financial calculator able to calculate 1%' and I22 is needed. )ou will need access to word processing! +.cel spreadsheets and the internet. Course %e&uire ents and .*pectations: /rades: 5etter grades will be assigned based on the university0s grading scale. Assign ents: In fairness to students who complete assignments on time! late assignments will not be accepted. )ou must turn in the assigments at the end of the lecture on the day they are due. Attendance: 2egular classroom attendance is mandatory. &bsence from lectures will negatively affect your grade as per university rules. &ttendance is entered into the C3#4I4 system daily. Mini ising disruptions: &ll cell phones should be turned off during class. :o not involve in side conversations.

Department of Management Science ! C""# " lamabad

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Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

Being prepared for class: you should be ready to discuss any assigned readings and to answer any assigned uestions for each day0s class! including being ready to open a case assigned for that day. Pro0ect1Case Studies )ou will be given a case study/project that you will have to work on and complete in group (<6( students) and submit one report per group. )ou will also be re uired to present your work before the rest of the class. +ach member of the group will be re uired to present. %resentations will be held during last week of the classes (if possible) or after the classes but before the terminal e.am. :etails of the case study/ project will be provided in the class at an appropriate time. %lease note that you will be penalised if your case study/project is overdue! does not conform to the prescribed format or if your submission is not done correctly. Acade ic !ishonesty: &cademic dishonesty is an offence that will not be tolerated in any form. &ny student who is involved in any such activity will be penalised to the fullest e.tent possible allowed by university regulations. If you have any doubts about whether an action constitutes academic dishonesty! before consult with your instructor before taking the action. Plagiaris and Cheating* the presentation by a student as his or her own work but is actually stolen from some one else. Fhenever a student submits a piece of writing claiming it to be his own authorship! it is generally understood that all the ideas! opinions! facts! figures! conclusions! revisions! words are the student0s original work! unless he/she has e.plicitly indicated otherwise using citations! footnotes! attribution in the te.t! and/or used uotation marks. The use of unauthorised material during an e.amination in order to secure or give help will not be tolerated. &cademic dishonesty also encompasses unauthorised copying and distribution of e.aminations! assignments! reports! projects or term papers or the presentation of unacknowledged material as if it were the student0s own work. & person failing to acknowledge and recognise the contribution of the original author! will be held responsible under academic deception. 4uch action will necessitate measures to discipline the student under the 8niversity0s academic dishonesty policy. &ny academic dishonesty would call for swift punitive action by the faculty and the names of the students involved would be reported to the concerned ;ead of :epartment.

Department of Management Science ! C""# " lamabad

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Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

Course "utline: ,eeks 'opics co#ered (ecture 4 5 6: Pro*ect Apprai al #ec+ni,ue %eadings: Chapter @@* -asics of Capital -udgeting ;andouts from selected te.t Feek @ Introduction by course instructor and the students. 3verview of the course and other related matters @ (e#els 2ui3es) Assign ents) Case studies "ormation of groups (<6( students per group) for future case studies! assignemnts and other groups tasks

:efinitions! Types of %rojects (based on C"s and relationship with other projects)! Importance of C-! 3verview of project appraisal methods (ecture 7 5 8: Pro*ect Apprai al #ec+ni,ue %eadings: Chapter @@* -asics of Capital -udgeting ;andouts from selected te.t

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2eturn on Capital +mployed %ayback %eriod (simple) :iscounted %ayback %eriod %ayback 2eciprocal #ultiple %ayback +.ercises (ecture 9 5 :: Pro*ect Apprai al #ec+ni,ue %eadings: Chapter @@* -asics of Capital -udgeting ;andouts from selected te.t :iscounted cash flow valuation 1et %resent 'alue 2esidual Income %rofitability Inde. Internal 2ate of 2eturn +.ercises

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@ @ @ < < ( ;-2 Case 4tudy on &%' 7ui/ @

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(ecture ; 5 <: Pro*ect Apprai al #ec+ni,ue %eadings: Chapter @@* -asics of Capital -udgeting ;andouts from selected te.t ( ( 2anking of projects using I22 and 1%'
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Issues with I22

Department of Management Science ! C""# " lamabad

Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

&djusted %resent 'alue #odified Internal 2ate of 2eturn Comparing projects of une ual lives (replacement chain method! e uivalant annual annuity method)

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Capital 2ationing (hard and soft! single and multiperiod) (ecture = 5 4>: Pro*ect Apprai al #ec+ni,ue %eadings: ;andouts from selected te.t Feek = 'aluation by multiples* the concept :ifferent metrices used for valuation by multiples %ros and cons of valuation by multiples

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+.cercises on valuation by multiples (ecture 44 5 46: Cash Flo$ esti ation for Pro0ect Appraisal %eadings: Chapter @<* Cash flow estimation and risk ;andouts from selected te.t Feek G Cash flow estimation for valuation (relevant cash flows) Ta.es The effect of Inflation on valuation :epreciation Terminal 'alues

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%ractice %roblems (ecture 47 5 48: Cash Flo$ esti ation for Pro0ect Appraisal %eadings: Chapter @<* Cash flow estimation and risk Feek H ;andouts from selected te.t :ifferent methods of calculating "ree cash "low +.cercises on calculating cash flows and applying %roject appraisal techni ues to evaluate projects

4 7

Department of Management Science ! C""# " lamabad

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Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

(ecture 49 5 4:: Pro0ect %isk Analysis and Manage ent %eadings: Chapter @<* Cash flow estimation and risk ;andouts from selected te.t Feek I 2isk &nalysis 4ensitivity &nalysis < < ( ( 7ui/ (

4imulation #anagement of 2isk (ecture 4; 5 4<: .sti ating Cost of Capital %eadings: ;andouts from selected te.t

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4ources of finance :etermining cost of* o :ebt o %referred 4tock o Common 4tock
Feighted &verage Cost of Capital (F&CC) (ecture 4% /&0 Basics of deri#ati#es

@ ;-2 Case 4tudy on Cost of Capital

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Introduction to derivative instuments Types of derivatives Importance of derivatives Impact of derivative instuments on financial worls (ecture 64 / &&1 ?nderstanding "ptions %eadings: ;andouts from selected te.t

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Call 3ptions and %ut 3ptions &merican 3ptions and +uropean 3ptions Terminologies Combination of 3ptions "actors affecting option prices

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(ecture &' / &(1 %eal "ptions %eadings: Chapter @(* 2eal 3ptions ;andouts from selected te.t Feek @< The concept of 2eal 3ptions o 3ption to +.pand o 3ption to &bandon o 3ption to Fait Impact of options on project evaluation +.ercises %roject/Case 4tudy

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Capital Budgeting and Financial Planning Module Handbook (MBA/RBA)

(ecture 69 5 6:1 Financial Planning %eadings: Chapter @E* Financial Planning $ "orecasting "inancial 4tatements Feek @( @ < < ( ( 7ui/ =

3verview of "inancial %lanning Corporate 'aluation and "inancial %lanning 4ales "orecast The &"1 "ormula

The "orecasted "inancial 4tatement #ethod (ecture 6; 5 6<1 Financial Planning %eadings: Chapter @E* Financial Planning $ "orecasting "inancial 4tatements Feek @E "orecasting financial 2e uirements when -alance 4heet 2atios are subject to change 2eview and +.cercises

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(ecture 6= 5 7>1 Feek @= :iscussion on %roject 2eview and sample soltion of the %roject &ny other topic not covered so far @ < < %roject/Case 4tudy :ue

(ecture 74 5 761 Feek @G

2evision / 34erci e :iscussion on "inal +.am

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Final .*a ination

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