Advanced Financial Analysis

Subject Area Accounting

Lecturer Eli Amir and Chris Higson

Course Code E422

Term SUM09
Credit Value 1

Aims and objectives

This course is about “fundamental” financial analysis; that is, evaluating the quality of
financial information and using the information to reveal the economics of firms. These are
core skills for equity and credit analysis, in investments, and investment banking and advisory
work. The techniques we develop are also applicable to the analysis of financial and strategic
decisions within firms, and indeed wherever there is a need to understand the financial
performance of firms. The course is advanced in the sense that we will be working at the
frontier of current practice, however the style is strongly practical.

Topics covered

• Financial analysis of operating performance.

• Residual income valuation techniques.
• Measuring quality of earnings and indicators of earnings management.
• Credit analysis and credit scoring.
• Advanced issues in Off Balance Sheet Financing.
• Analysis of Goodwill, Intangibles and R&D.
• Analysis of employee post-retirement benefits.
• Accounting for employee stock options.
• Analyzing financial statements of Financial Institutions.
• Analyzing financial instruments and hedging activities

Who should attend?

The course is designed for anyone planning a career in which they will have to evaluate or
make decisions based on financial data. The course is particularly suitable for financial
analysts, bankers, investment bankers, security analysts, institutional investors, and
consultants.

Format and teaching method

The course will consist of lectures and case study discussions. Students should be prepared
to discuss problems and cases in class.

Reading
There is no single text for the course. We will use chapters from the books listed below, that
focus primarily on accounting and financial analysis, assessing the quality of accounting
information, and analyzing operating profitability and growth.

Chris Higson, Financial Statements, Economic Analysis and Interpretation, 2007, Rivington.
White, Sondhi and Fried. The Analysis and Use of Financial Statements, 3rd Edition, John
Wiley.

Stephen Penman, Financial Statement Analysis and Security Valuation, 2006, McGraw Hill.

Palepu, Healy and Bernard, Business Analysis and Valuation, 2007 (Text only), Thomson.

Stephen Ryan, Financial Instruments and Institutions: Accounting and Disclosure Rules,
Second Edition, 2007, John Wiley & Sons

Pre-requisites
This is an advanced course in financial analysis. Although some of the topics are similar to
those covered in most financial analysis courses, we intend to increase the level of
complexity and detail in this course. Thus, the course is designed for those who feel more
comfortable with financial accounting and that have more advanced knowledge than those
who have just successfully completed the core financial accounting course. We expect the
course to be most suitable for full and part time Masters in Finance students. However, MBA
and EMBA students with prior accounting background (or those who have exempted out of
the core MBA course) are also welcome. It is your responsibility to ensure that you have the
appropriate level of pre-requisite knowledge before committing to the course (i.e. before the
Add & Drop deadline) and you should speak with the professors if in any doubt.

Assignments and Assessments

Class participation 10%

Individual assignments 90%

Students will be required to submit three individual assignments, that contain problems that
facilitate understanding of the topic area.
Financial Analysis of Mergers, Acquisitions and Other Complex
Corporate Restructurings

Subject Area Accounting

Lecturer Professor Eli Amir
Course Code E107
Term SUM09
Credit Value 1

Aims & Objectives

The aim of this course is to help you become a more informed user or issuer of financial
information related to mergers, acquisitions, and other complex corporate financial structures
(and structural changes). The financial reporting rules relating to these events vary both
within and across countries – in some instances, the rules are completely unspecified,
leaving companies with a large degree of flexibility, whilst in other cases they are extremely
complex. This situation has resulted in diversity in practice and, perhaps, the creative
interpretation by companies of GAAP (Generally Accepted Accounting Principles) to achieve
desired financial reporting objectives.

The course will enhance your ability to relate economic events to the financial treatment of
the topics covered. Corporate financial statements are a key source of information about the
economic activities of a firm. Issuers (firm management) seek to communicate to users
(analysts, investors, creditors, etc.) information about the firm’s performance and prospects,
and users seek to understand the implications of financial statement information for the firm’s
current and future prospects. The course focus is on understanding better the links between
underlying business events and the information in financial statements, and how these links
affect what can be learned about the economic activities and position of the firm.

The course is particularly suitable for those planning a career in investment and merchant
banking, venture capital, corporate finance, investment analysis or private equity, but may
also be relevant to careers in consulting or general management. The course is particularly
relevant to those planning a career in which they will encounter mergers, acquisitions and
other similar corporate transactions.

Topics Covered

• Methods of accounting for mergers and acquisitions

• Issues related to goodwill, acquisition provisions and tax.
• Financial reporting for business combinations that are effected by contract, rather than
by exchange of equity interests.
• Financial reporting implications of joint ventures.
• Leveraged buyouts and recapitalizations
• Spin-offs, carve-outs, tracking stock.
• Special purpose entities.

Format & Teaching Methods

The course is taught using a combination of lectures and case studies, and relies heavily on
the analysis of a number of major transactions.
Pre-Requisites & Input Required
Participants must have completed a first course in accounting (Financial Accounting and
Analysis / Financial Analysis / Understanding Financial Analysis).

The course includes a detailed analysis of 9 case studies based on major transactions.
Students are expected to read and analyze these case studies prior to sessions. In addition,
students are required to read background materials such as press releases, financial
statements and accounting pronouncements.

Assignments & Assessment

The course grade will be based on three case write-ups (51%), three problem sets (36%)
and class participation (13%). Case write-ups should be completed in groups of up to three
students. Problem sets must be completed on an individual basis.

Class Make-up
Except for one guest lecture, there are no external participants in the course.

A Note on the Instructor

Professor Eli Amir, PhD (U.C. Berkeley) joined London business School in August 2003. He
has taught courses in a broad range of subjects in accounting, focusing on Financial
Accounting, Corporate Financial Reporting, Financial Analysis of Mergers and Acquisitions,
valuation and empirical research in accounting. During 1991-2000, Eli Amir was an associate
professor at Columbia University’s Graduate School of Business. During 2000-2003, Amir
served as Chairman of the Israel Accounting Standards Board. He has published many
articles in leading academic journals.
Financial Statement Analysis

Subject Area Accounting

Lecturer Lakshmanan Shivakumar (Shiva) + TBC
Course Code E444
Term AUT08 / SPR09
Credit Value 1

Aims and Objectives

Financial reports are the primary means by which managers communicate company results
to investors, creditors and analysts. These parties use the reports to judge company
performance, to assess creditworthiness, to predict future financial performance, and to
analyse possible acquisitions and take-overs. Users of financial statements must be able to
meaningfully interpret financial reports, construct measures of financial performance and
analyse the reporting choices made by companies. Also, since company managers choose
accounting techniques when making their reports, users must learn to undo the effects of
these accounting choices. The purpose of this course is to give the foundation for such
analysis.

Who should attend?

Reading and interpreting financial statements is a basic skill that impacts any business
decision that relies on financial statements. This course focuses on practical application of
the accounting knowledge gained in the core financial accounting course. The core
accounting courses focuses on preparing financial statements, while this course focuses on
reading and interpreting the financial statements.

Topics Covered
In this course, students will
• Learn how firms’ operating activities are reflected in their financial reports
• Analyse the link between accounting choices and their reflection in the financial
reports
• Understand the rationale for various accounting methods
• Develop a critical view of managers’ accounting choices
• Identify and undo earnings management
• Learn to compute and interpret financial ratios

Format and Teaching Methods

The course consists of 10 sessions of approximately 3 hours each. Developing expertise in
financial analysis requires a significant amount of practice. We will therefore approach this
task by learning the relevant theory and experimenting with its applications. We will look at
“textbook” cases as well as at financial statements of real companies.

Pre-Requisites & Input Required

Successful completion of core Financial Accounting.
Please note that there is some overlap between the content of this elective and that of
Advanced Financial Analysis (E422). If you are considering taking both electives you should
speak to the professors in advance of the Add & Drop deadlines.

Assignments and Assessment

Final sit down exam 75%
Class participation 25%
PhD Seminar in Accounting 1

Subject Area Accounting

Lecturer TBC
Course Code E132
Term SPR09
Credit Value 1

Aims & Objectives

This is the first of two courses required of all accounting PhD students and recommended for
finance PhDs. It provides a thorough, doctoral-level grounding in the basic theoretical and
empirical methods of accounting. Masters programme participants may take this course as
one elective. While the course is not designed primarily for MiFs or MBAs, a few participants
each year may find that they provide an effective way to learn the rigorous foundations that
underlie the accounting and financial analysis taught on the Masters programmes. The PhD
courses are very demanding but would be especially relevant to those who are interested in
research in accounting, financial analysis and valuation.

Topics Covered

The topics to be covered are likely to be drawn from the following:

Theoretical:
• Valuation models
• Principal-agent theory
• Models of disclosure
• Rational expectations models of information

Empirical:
• Relation of accounting information and stock prices
• Voluntary actions (such as accounting method choice, earnings management,
etc.), and market effects
• The regulatory effects of accounting

Format & Teaching Methods

Much of the teaching will be based on articles and readings, which you are required to study
in depth. You will be expected to participate fully in the seminars and present a paper.

Pre-Requisites & Input Required

Masters programme participants who wish to take this seminar must get prior approval of the
lecturer. You will need a strong quantitative background.

Assignments & Assessment

Assessment will be by means of graded problem sets, class participation and a research
proposal
Securities Analysis & Financial Modelling
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Subject Area Accounting
Lecturer Lakshmanan Shivakumar (Shiva)
Course Code E206
Term AUT08/SPR09
Credit Value 1
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Aims and Objectives
This course focuses on the tools and techniques of securities analysis and the development
of a framework for making investment decisions. The course covers fundamental analysis
(“bottoms up”, firm-level, business and financial analysis) and development of financial
models for determining the intrinsic value of a firm’s stock. The firms’ financial statements
provide the major source of information for the analyses. The course develops the analytical
framework necessary to understand business performance and financial structure, and
shows how to produce a full financial model of the firm. We then see how this framework
can be used by investors and outside analysts to appraise and value companies and, in
doing so will cover alternative methods of appraisal and valuation.

The framework of ideas that we develop in this course is valuable for anyone wanting to
understand the financial performance of firms or conduct corporate valuation. The course is
particularly appropriate if you are planning a career in investment banking, consulting, equity
research, credit analysis or fund management.
==
Topics Covered
• Use of financial statement analysis to measure economic profitability and financial
condition of a firm, and to identify the sources of its competitive advantage.
• Evaluation of accounting quality in the context of financial analysis and valuation.
• Development of proforma financial statements
• Use of financial models to forecast dividends, cash flows and earnings
• Analysis of credit risks and computation of cost of capital
• Construction of models for corporate valuation, such as Residual-income, DCF, etc.
• Valuation of different types of firms
• Use of financial analysis and modelling techniques in financial, strategic and
restructuring decisions.
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Format and Teaching Methods

The course will consist of lectures and case study discussions.

Pre-Requisites & Input Required

Participants must have successfully completed core courses in Financial Accounting and
Finance. This course involves a medium to heavy workload.

Assignments and Assessment

Individual report 40%
Group report 50%
Class participation 10%=
Using Better Measures to Improve Performance

Subject Area Accounting

Lecturer Sir Andrew Likierman
Course Code E383
Term SPR09
Credit Value 1

Aims and objectives

As leader, manager, entrepreneur or analyst, you will need to measure performance of
organisations and individual activities. Your own success will also be judged and rewarded
on the basis of performance. Yet performance measurement techniques are often
inadequate and even misleading. The elective provides a way to improve them and in doing
so to get comparative advantage for yourself and your organisation. My current directorships
(see “Note on the instructor” below) and previous experience gives me the perspective to
combine ideas with practice. My approach is to work from real problems to practical answers,
recognising differences in performance culture between countries and organisations.

Topics covered

• How do you measure company success? The role of markets in determining measures.
Will shareholder value displace all other measures? How much choice do companies
really have?
• Understanding financial and non-financial measures and their pitfalls. What is an
excellent company?
• Improving internal measurement – the role of value-based management, balanced
scorecards, non-financial measures, comparisons (including benchmarking) and
budgeting.
• New approaches to measuring the performance in organisations, including activities
(such as coaching), functions (such as marketing) and those that run them (such as the
CFO), initiatives (such as the balanced scorecard) and programmes (such as Corporate
Social Responsibility).
• The possibilities and problems of linking performance and reward.
• An optional session on applications in the public and not-for-profit sectors.

Format and teaching methods

The elective is cross-disciplinary, with material from strategy, finance, accounting,
organisational behaviour and operations management. So it’s about using judgement rather
than doing numbers. It deals with the “big picture” (including the role of social and
environmental measures) and measuring inside the organisation. It includes discussions of
how to tackle tough measurement problems. Examples and mini-cases from actual
companies will be used in each session.

Lectures will incorporate group sessions on dealing with problems and there will be guest
speakers on key issues. In the last few years, guests have included Chairmen, senior
executives and operational managers of large and small organisations. Each session will
start with examples of performance issues in the news and an example taken from a real
organisation.
Pre-requisites and input required
This is a course covering all aspects of management, not a technical accounting course and
will draw on a wide range of core courses. Input required is based on selected reading each
week as well as assignments (see below).

Assignments and assessments

The individual assignment (60%) will involve choosing something which you wish to measure
and applying a measurement framework to it. The Group assignment (40%) gives you a
chance to measure the success of an organisation. There is no exam.

Class make-up
To make sure that those taking who sign up have the greatest chance for personal contact,
the course is not open to auditors or outside participants.

A note on the instructor

I am currently a Director of the Bank of England, Barclays Bank, Applied Intellectual Capital
plc (an AIM-listed California technology incubator) and a UK Health Trust. My previous
experience includes being non-executive Chairman of a market research company (MORI
Ltd) and a chain of bookshops (Economists Bookshops Ltd), chief executive of the overseas
division of a textile company (Qualitex Ltd) and one of the Managing Directors of the UK
Treasury.
Venture Capital & Private Equity

Subject Area Accounting

Lecturers Eli Talmor, Florin Vasvari
Course Code E126
Term AUT08/SPR09
Credit Value 1

Co-instructor: Dwight Poler, Managing Director, Bain Capital Europe.

Aims & Objectives

This course covers the concepts, techniques, instruments and institutions involved in
private equity investment. The course addresses the two segments of private equity: venture
capital and buyouts.

The course is structured along five main themes: structure of the private equity market,
venture capital contracts, valuation, deal processing, and harvesting. It also covers the
structure and strategy of the private equity firm.

The objectives of the course are to:

ƒ Provide an understanding of the private equity financing process and transaction
dynamics.
ƒ Employ corporate finance principles (such as contingent claims and contracting
theory) for the analytical valuation of new ventures and buyouts.
ƒ Build familiarity with the structure and key institutional features of the global private
equity industry.
ƒ Analyse leverage buyout equity transactions.

Topics Covered

• Nature and structure of the private equity industry

• Structure of venture capital contracts.
• Deal selection and diligence.
• Unlocking value in private equity: the IPO decision and other methods of exit.
• Special aspects: secondary transactions, emerging markets, venture lending.

Format & Teaching Methods

Sessions will combine case studies, lectures and guest speakers.

Pre-Requisites & Input Required

Participants must have completed a first course in accounting and a first course in finance
(for General Management students, Capital Markets & Financing is recommended but not
essential).

Assignments & Assessment

• Class participation (10%)
• Case analyses (75%)
• Final case assignment (15%)