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Strategic Financial Management Great Lakes Institute of Management Gurgaon PGPM 2012-13 TERM IV Sanjoy Sircar sanjoy.s@greatlakes.edu.in COURSE OBJECTIVES CAREER TRACK: This course in Strategic Financial Management builds on the concepts developed in Finance during the earlier terms. The goal is to develop the financial tools, both theoretical and practical, essential to a thorough understanding of the issues that plague managerial decision making at any level across all functional areas. The overriding objective is to demonstrate that contrary to popular belief, while financing decisions are not the all and only criterion for decision making, but given that any enterprise, whether commercial or not, is finally judged by its financial performance, so a Corporate Financial Officer CAN create value through financing, strategic and operating decisions. Any corporate action has its consequent financial implications even if it does not become apparent in the near term and students build the knowledge and skills critical to an effective managers responsibilities of proposing, assessing and implementing financial investment decisions. The course would introduce advanced valuation techniques, and explore the empirical difficulties and judgmental ambiguities inherent in applying the valuation process. It seeks to identify the conditions under which each valuation technique is appropriate. WHEN to use a technique is as important as knowing HOW and our objective would be to reinforce that in this class. An overriding objective of the course will be to demonstrate that financial strategies of corporations are usually a complex amalgam of multiple factors, both exogenous and endogenous and some financial and some outside the realm of the finance professional. Nevertheless, the finance professional is very often constrained and / or influenced by the decisions taken beyond his / her own area of expertise. A large part of the course deals in cases that are simply applications of concepts you have already covered under other core / elective courses with only a different perspective that of the user corporation rather than the financial institution which is a counter party to the transaction. We would also build on the latest thoughts on issues like cost of capital that have been discussed in earlier trimesters / first year in the traditional,
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Corporate Finance: Theory and Practice, Aswath Damodaran, John Wiley, 1997.
I may decide to supplement the lectures with articles and papers from time to time.
Options, Futures and Other Derivative Securities, John Hull, Prentice Hall, Second Edition, 1996. Real Options: Managing Strategic Investments in an Uncertain World, Martha Amram and Nalin Kulatilaka, Harvard Business School Press, 1999.
Corporate Financial Distress and Bankruptcy, Edward I Altman, John Wiley, 1993. Capital Markets and Corporate Governance, Nicholas Dimsdale and Martha Prevezer, Oxford / Clarendon Press, 1994.
CASE 4: Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures 1. Why is GM worried about the level of the yen ? 2. How important is GMs competitive exposure to the yen? 3. How would you go from the information in the case about competitive interactions with Japanese manufacturers to a value exposure for GM ? 4. Are there less information intensive methods that might allow you to assess the competitive exposures of GM, specifically, or other firms generally ? How would you implement such a method ? SESSIONS 5-7 :LARGE PROJECTS, LEVERAGE AND FIRM VALUATION CASE 5: TEXAS HIGH SPEED RAIL CORPORATION 1. Consider the economic merits of the high speed rail system described in the case. Before performing any discounted cash flow analyses, do you expect the project to have a positive NPV ? 2. Exhibit 3 presents the projects free cash flows (FCF). Make sure you understand the definition and calculation of free cash flow. What is the weighted average cost of capital at its fully expanded capital structure ? What do you conclude about the projects NPV based on Exhibits 3 and 4, and your own calculations ? 3. Study the equity cash flows (ECF) presented in Exhibit 7 and make sure you understand the difference between them and the Exhibit 7 cash flows be discounted to give an estimate of the projects NPV ? What is the NPV according to your calculations ? How does it compare with the estimate based in Exhibit 3 ? 4. Should THSRC proceed with the next phase of the project ? NOTE: For the sake of simplicity, assume the risk premium at 7.5%
Readings: 1. Measuring Free Cash Flows for Equity Valuation: Juliet Estridge and Barbara Lougee, Journal of Applied Corporate Finance, Spring 2007, pp. 60-71. 2.Accounting for Sovereign Risk When Investing in Emerging Markets: V. Ravi Angshuman, Sheridan Titman and John Martin, Journal of Applied Corporate Finance, Spring 2011, pp.41-48. SESSIONS 8-9: FINANCIAL RISK MANAGEMENT Reading: 1. Rethinking Risk Management, Rene M Stulz, The Ohio University, The New Corporate Finance: Where Theory Meets Practice, pp. 411-427, Donald H Chew, Jr. ed., McGraw Hill International 3 rd edition 2.The Theory and Practice of Corporate Risk Management: Henri Servaes, Peter Tufano, and Ane Tamao, Journal of Applied Corporate Finance, Fall 2009, pp. 60-78. CASE 7: AMERICAN BARRICK RESOURCES CORPORATION: MANAGING GOLD PRICE RISK 1. In the absence of a hedging program using financial instruments, how sensitive would Barrick stock be to gold price changes ?For every 1% change in gold prices, how might its stock be affected ? How could the firm manage its gold price exposure without the use of financial contracts ? 2. What is the stated intent of ABXs hedging program ? What should be the goal of a goldmines price risk management program ? 3. What would convince you that a price risk management program would create value for its shareholders ex ante ?
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SESSSIONS 12-13: INTEGRATED FINANCIAL DECISION MAKING READINGS: 1. Learnings from Financial Innovation : Nigel Jenkinson, Adrian Penalver and Nicholas Vause 2. Postmodern Corporate Finance: Gregory V Milano, Journal of Applied Corporate Finance, Spring 2010, pp. 48 -59. Case 9 : Intergen and the Quezon Power Project: Building Infrastructure in Emerging Markets 1. How does Intergen create and add value in the power industry ? 2. Why does Intergen appear to have only a handful of competitors ? 3. Given what was known in late 1994, would you have recommended that Intergen invest in the Quezon project ? What would have been your main concerns ? 4. Given the situation in late 1997, what should Greg Daul recommend to Carlos Riva at the upcoming board meeting ?
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