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Assignment A
Question 1.(i) Sweat equity is the best form of reward for those who contribute to the growth of
a company. Discuss.
(ii) Why do investor add real estate in their portfolio?
(iii) What are the steps taken by SEBI in the primary market to protect investors?
A.1 (i) Sweat Equity, as the name suggests, is the equity issued in lieu of contribution in terms
of time given, efforts made and services rendered by the employees of the company. It is used
to refer to a form of compensation by businesses to their owners or employees. The term is
sometimes used in partnership agreements where one or more of the partners contribute no
financial capital. In the case of a business startup, employees might, upon
incorporation, receive stock or stock options in return for working for below- market salaries
(or in some cases no salary at all).
The equity that is created in a company or some other asset as a direct result of hard work by
the owner(s)
The Companies Act provides for issue of sweat equity shares to employees and/or directors of
companies on favorable terms in recognition of their work. Sweat equity makes employees
part owners of the company and gives them a share of profit earned.
Thus, it is the most suitable form of reward for those who contribute to the growth of the
company.
However, in India, as per SEBI and DCA regulations, sweat equity shares can be issued only
to employees or directors.
A.1 (ii)
The main aim of an investor, while deciding on a portfolio is to maximize return and minimize
risk of holding an asset. The total return comprises of the periodic receipts plus change in
price of the asset or capital appreciation. The risk in investment is the chance that the realized
return may be less than the expected return.
In case of investment in real estate, the investor receives periodic receipts in the form of
rentals and the property generally appreciates over period of time. Another reason to choose
real estate in portfolio is its ability to serve as an inflation hedge, since the owner can increase
rentals during inflation. Real estate also has the unique ability to reduce risk in the way
properties are leased. Portfolios that have followed a cash flow strategy and decided to lock in
rates in long-term leases have less risk exposure to market movements, but they also have
less inflation-hedging ability.
A.1 (iii)
SEBI has taken various steps and issued guidelines to protect the interest of the investors in
the primary market.
With the objective of boosting investor confidence in the primary market, SEBI brought the
concept of Anchor Investors. This allows an individual or entity to subscribe up to 30% of the
institutional share of an IPO, similar to a pre-placement agreement. Since 50% of an IPO is
typically reserved for institutional investors, this would mean up to 15% of the total offering
could be given to an anchor investor. This would thereby impute confidence to the retail
investors as they see a large investor taking a significant stake in the IPO.
SEBI has recently introduced a new process applicable to retail individual investors popularly
referred to as ASBA (Application Supported by Blocked amount) process. Under this process,
the bid amount is blocked in the investor account at the time of bidding. If and when an
allotment is made, his account will be debited and the money will be remitted to the company.
Therefore, the bid amount remains in his account earning interest during the whole process
period. Investors account will be debited only to the extent of shares allotted, if any, and the
remaining amount will be unblocked. There will be no refund as such and therefore the
investor will not encounter the problems related to non-receipt of refund.
SEBI has increased the IPO card validity from 3 months to 1 year, so that IPO Company can
bring the IPO in the market at a right time (say in a bull trend), This will provide better
opportunity for the investors.
No listed company will be allowed to issue shares with superior voting rights. There could also
be no preferential issues with superior voting rights.
distinctive numbers as were previously existing. Rematerialisation is offered for all those
scrips which are eligible for demat in the depositories list of securities available for
dematerialization.
A. 2 (ii)
Stock market indices are the barometers of the stock market.
These help to recognize broad trend in the market. The investor can use the indices to
allocate the funds rationally among the stocks. Technical analysts use the indices to predict
the future of market.
The Dow Jones Industrial Average (DJIA), one of the most popular stock market indices
experienced a downfall in the early stages of 2004 which was largely attributed to an increase
in the Money Supply by the Federal Reserve in the USA . The Technical Indicator Index (TII)
studies incorporating the Short Term Index and Intermediate Term Index from the period
January to May 2004 for the American equity markets showed largely negative or bearish
trends for both the indices as they closed at 3.50 and 48.48 respectively. Whereas the shortterm index is a useful predictor of equity markets over the short run, the intermediate term
index serves as a warning system for trend changes of considerable magnitude.
A.2 (iii)
A bull market is associated with increasing investor confidence, and increased investing in
anticipation of future price increases.
Short interest is the total number of shares of a particular stock that have been sold short by
investors but have not yet been covered or closed out.This can be expressed as a number or
as a percentage. When expressed as a percentage short interest is the number of shorted
shares divided by the number of shares outstanding. For example, a stock with 1.5 million
shares sold short and 10 million shares outstanding has a short interest of
15%(1.5 million/10million = 15%).
Most stock exchanges track the short interest in each stock and issue reports at month's end.
These reports are great because, by showing what short sellers are doing; they allow
investors to gauge overall market sentiment surrounding a particular stock. Or alternatively
most exchanges provide an online tool to calculate short interest for a particular security. For
example check out the Nasdaq's short interest calculator; it's very easy to use. A large
increase or decrease in a stock's short interest from the previous month can be a very telling
indicator of investor sentiment. Let's say that Microsoft's (MSFT) short interest increased by
10% in one month. This means that there was a 10% increase in the amount of people who
believe the stock will decrease. Such a significant shift provides good cause for us to find out
more. We would need to check the current research and any recent news reports to see what
is happening with the company and why more investors are selling its stock.
A high short-interest stock should be approached for buying with extreme caution but not
necessarily avoided at all cost. In fact, many investors use short interest as a tool to determine
the direction of the market. The rationale is that if everyone is selling, then the stock is already
at its low and can only move up. Thus they feel that a high short-interest ratio is bullish because eventually there will be significant upward pressure on the stock's price as short
sellers cover their short positions (i.e. buy back the stocks they borrowed to return to the
lender).
Question 3.(i) Explain the utility of the economic analysis and state the economic factors
considered for this analysis.
(ii) What is meant by fundamental analysis? How does fundamental analysis differ
from technical analysis?
(iii) What industry life cycle exhibits the status of the industry and gives the clue
to entry and exit for investors Elucidate.
A.3 (i)
Resources are scarce, while human wants and needs tend to be unlimited. Economic analysis
is the study of supply and demand, and the choices (decisions) and incentives (pricing, taxes,
etc.), so that scarce resources are used efficiently.
The process of economic analysis involves identifying appropriate economic indicators,
collecting economic data, preparing or selecting an economic forecast, interpreting the
economic data, monitoring intervening forces and using the economic analysis for decision
making.
Decision makers use the results of an economic analysis for decision making. Astute decision
makers recognize that economic forces are uncontrollable and that current strategies may
need to be adjusted to cope with or overcome the economic changes. They approach with
caution opportunities and threats discovered as a result of economic scanning and analysis.
They pursue a proactive approach, however, knowing that an economic analysis enables
them to choose from alternative approaches , how to employ scarce or uncommon resources
and achieve objectives in the most efficient and cost effective manner.
The economic factors considered for this analysis are unemployment rates, personal income
and expenditures, interest rates, business inventories, gross product by industry, and
numerous other economic indicators or indices. Such measures of economic performance
may be found in secondary sources such as business, trade, government, and generalinterest publications.
A.3 (ii)
Fundamental analysis is the examination of the underlying forces that affect the well being of
the economy, industry groups, and companies. The term simply refers to the analysis of the
economic well-being of a financial entity as opposed to only its price movements. As with most
analysis, the goal is to derive a forecast and profit from future price movements. It is
performed on historical and present data, but with the goal of making financial forecasts.
At the company level, fundamental analysis may involve examination of financial data,
management, business concept and competition. Also known as quantitative analysis, this
involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of
a company. Fundamental analysts look at this information to gain insight on a company's
future performance At the industry level, there might be an examination of supply and demand
forces for the products offered. For the national economy, fundamental analysis might focus
on economic data to assess the present and future growth of the economy. To forecast future
stock prices, fundamental analysis combines economic, industry, and company analysis to
derive a stock's current fair value and forecast future value. When talking about stocks,
fundamental analysis is a technique that attempts to determine a securitys value by focusing
on underlying factors that affect a company's actual business and its future prospects.
Technical analysis, on the other hand, looks at the price movement of a security and uses this
data to predict its future price movements. Fundamental analysis is different from technical
analysis as a technical analyst approaches a security from the charts, while a fundamental
analyst starts with the financial statements.
A.3 (iii)
There are typically five stages in the industry lifecycle. They are defined as:
i. Early Stages Phase - alternative product design and positioning, establishing the
range and boundaries of the industry itself.
ii. Innovation Phase Product innovation declines, process innovation begins and a
"dominant design" will arrive.
iii. Cost or Shakeout Phase - Companies settle on the "dominant design"; economies of
scale are achieved, forcing smaller players to be acquired or exit altogether. Barriers to entry
become very high, as large-scale consolidation occurs.
iv. Maturity - Growth is no longer the main focus, market share and cash flow become the
primary goals of the companies left in the space.
v. Decline - Revenues declining; the industry as a whole may be supplanted by a new
one.
Each stage shows the status of the industry and gives a clue for entry or exit for investors.
Under the production and market introduction phases, revenues and earnings are likely to be
very low, which makes investments during these phases more speculative in nature.
Revenues and earnings are likely to below because there is little demand for the product, or
the product is not completed. Expenses are likely to be very large during these phases as a
Company or industry spends a lot on marketing and research.
Through the growth phase, revenues and margins are likely to be on the rise due to an
increase in demand for a product and the pricing power the firm has due to a small number of
competitors. Stock prices are likely to rise during this phase.
During the maturity and stability phase, revenues and margins are likely to decline due to
lower sales demand and more competition. Stock prices are likely to decline during these
phases.
Question 4.Stocks L and M have yielded the following returns for the past two years.
(i) What is the expected return on portfolio made up of 60 percent of L and 40 percent of M?
Find out the standard deviation of each stock.
(ii) What is the covariance and co-efficient of correlation between stock L and M?
(iii) What is the portfolio risk of a portfolio made up of 60 percent of land 40 percent
A.4 Answer 4i)
Expected return on portfolio is
E (Rp)
= XL E( RL ) + XM E (R1M)
for95
= 7.2 + 5.6
=12.8
E (Rp)
= XL E(RL) + XM E(R1M)
=0.60*18 + 0.40*12
=10.8 + 4.8
=15.6
.for96
Question5. For the first four years XYZ firm is assumed to grow at a rate of 10 per cent. After
four years the growth rate of dividend is assumed to decline linearly to 6 per cent. After 7
years, the firm is assumed to grow at a rate of 6 per cent infinitely. The next year dividend is
Rs.2 and the required rate of return is 14 per cent. Find out the value of the Stock.
A. 5
Stock Price =
Dividends (Div)
-------------------------------------------------Expected Return(R) Growth Rate(G)
Or,
Stock Price =
Div
---------(R G)
2
-------------------(0.14 0.06)
At a growth rate of 6% infinitely
2
-------0.08
25Rs.
Assignment B
Question 1.Mr. Rajan Tiwari is planning to invest in the equity stocks of Xerox India Limited.
The current share price is Rs.150 per share. Xerox has declared a dividend of Rs.10 per
share for the current year. Mr. Tiwari is of the opinion that the dividend per share will remain at
the same level for the next two years, after which it will grown at the rate of 25% per annum in
the third and fourth years. From the fifth year onwards, dividends are expected to grow at a
normal rate of 12% per annum. If the required rate of return of Mr. Tiwari is 14% per annum,
do you suggest him to purchase the share at the current price.
a. Intrinsic value of the stock is Rs.551.98 and it is recommended to purchase the share
b. Intrinsic value of the stock is Rs.551.98 and it is nor recommended to purchase the share.
c. Intrinsic value of the stock is Rs.517.83 and it is recommended to purchase the share.
d. Intrinsic value of the stock is Rs.517.83 and it is not recommended to purchase the share
e. Intrinsic value of the stock is Rs.150 and it is recommended to purchase the share.
Answer 1:
Present value of future cash flows for first four years including current year is
10 + 10 / (1.14) + 10 / (1.14)2 + (10+(0.25*10)) / (1.14)3 + (12.5+(0.25*12.5)) / (1.14)4
= 10 + 8.77 + 7.69 + 8.44 + 15.625/1.688
= 10 + 8.77 + 7.69 + 8.44 + 9.25
= 44.15
5th Year = 405.76
Total = 449.91
Above amount is greater than initial outlay of 150, hence recommended to buy the stock.
Question 2. Vishnu ltd, has just paid a dividend of Rs.16 per share. As a part of its major
reorganization of its operations, it has stated that it does not intend to pay any dividend for the
next two years. In three years time it will commence paying dividend at Rs.12 per share and
the directors have indicated that they expect to achieve dividend growth at 14% p.a.thereafter.
If the reorganization does not take place, dividend will be paid in the next two years and the
expected dividend growth will remain at the present level of 8% p.a. The firms cost of equity is
18% (i.e. the return expected by the equity investors) and will be unaffected by the
reorganization. What will be the value of firms shares in both the situations? Moreover, advice
the directors to which process they should adopt for?
Answer 2:
In case of reorganization
PV of future cash flows is 16 + 16/1.18 +
= 16 + 13.56 + 11.49 + 97.38
= 138.43
In case of no reorganization
PV of future cash flows is - 16 + 182.59
= 196.59
Hence, reorganization is better.
Question 3. Sundaram finance Ltd. has an investment opportunity available which will involve
a capital outlay in each of the next 2 years and which will produce benefits during the following
3 years. A summary of the financial implications of this investment is given below.
Answer 3:
Case A Total 25+21.19+17.95+15.22+429.82 = 509.18
Case B Something wrong in line highlighted in red i.e. Cash received from the new
investment is therefore, to reduce the dividend payments made in the 10% will also
be maintained because of other operations.
However if the question intent is (assumption is at my end) that growth is 10% all through year
5 plus all extra cash as dividend + year six is 15% growth resumes
Total = 25+23.3+21.73 + (20.25+1.22)+(18.88+11.86)+(17.60+17.92)+546.87 = 704.63
Hence investment in case B is much better.
4. Read the case study given below and answer questions given at the end.
Case study
.Questions
1. Compute the beta and interpret it for Prashant. Examine different circumstances with
analysis of data.
Answer 1.
Here market return (proxy Nifty) is not given. Lets assume 15% correction
Average Beta Infosys = 0.0265
Expected return from Infosys = 5.15+15*.0265=5.55%
Average Beta Hamdard = 0.044
Expected return from Hamdard = 5.15+15*0.044=5.81%
So returns from Hamdard are marginally higher. However D/E ratio is also higher.
Since investor is conservative, Infosys is a world class company and provide IT solution so as
per current scenario Infosys is recommended.
Since corporate tax is there on both cases (assumption); it has no bearing on investment
decision.
Assignment C
1. Which of the following is /are true?
a. All investments are speculative by nature
b. Genuine investments involve calculated risks which are consistent with the expected
returns
c. The ultimate objective of an investment or speculative stock is to increase the terminal
wealth of the person concerned
d. Both b and c above
Liquidity
The absence of the need for regular income
the preferred time horizon
Risk tolerance
10%
25%
30%
50%
a.
b.
c.
d.
10%
24%
30%
none
8. Risk(s) affecting all the securities in the market is/are
a.
b.
c.
d.
a.
b.
c.
d.
1
b. 0
c. -1
Greater than 1
10. Of the following, systematic risk encompasses
a.
b.
c.
d.
Business risk
Inflation risk
Interest rate risk
Both b and c
11. Securities which are plotted above the SML line are
a. Under priced
b. Over priced
c. Favourable investments
d. Both a and c
12. Covariance between a stock and a market index and the variance of the market
index were found to be 33.56 and 19.15 respectively. The Beta of the stock is
a. 1.55
b. 1.75
c. 1.85
d. 1.95
13. The beta of a stock is 1.12 and its covariance with the market is 220. The
standard deviation of market returns is
a.
b.
c.
d.
16%
14%
12%
11.30%
14. The characteristic line established the relationship between
a.
b.
c.
d.
Default risk
Purchasing power risk
Interest rate risk
Reinvestment risk
a.
b.
c.
d.
a.
b.
c.
d.
a.
b.
c.
d.
Decline
Maintain the same trend as before
Rise
Rise to an extent and then take a downturn
a.
b.
c.
d.
Maturity stage
Expansion stage
Pioneering stage
Declining stage
22. Which among the following is not volatile?
a.
b.
c.
d.
a. Market value
b. Cost
c. Book value
d. Replacement value
24. The measurement of leverage is
a.
b.
c.
d.
PAT/Equity
Equity/Debt
Total assets/Equity
Total assets/Debt
25. Which of the following is/are cyclical industries?
a.
b.
c.
d.
a.
b.
c.
d.
27. A business division with high growth but low relative market share is referred
to as a
a.
b.
c.
d.
Cash cow
Profit center
Question Mark
Star
28. during an inflationary period a company can artificially show higher profits by
a.
b.
c.
d.
a.
b.
c.
d.
Profit differentiation
Switching costs
Capital requirements
Low value addition
31. For a symmetrical triangle to be formed in a series of rallies
a.
b.
c.
d.
The succeeding peaks are lower than the preceding ones at the top
The succeeding crest at the bottom are lower than the preceding ones
The succeeding crest at the bottom are higher than the preceding ones
Both a and c
Flag
Rectangle
Gap
Both a and b
34. In a technical analysis the exponent value for calculating a 10 day Exponential
Moving Average will be
a. 0.2
b. 0.1
c. 2
d. 20
a.
b.
c.
d.
Rs. 200
Rs. 250
Rs. 300
Rs. 350
40. A put option was written at a premium of Rs. 400. The current market price of
the stock is Rs. 38 and the exercise price of the contract is Rs. 35. After a
period of two months the price of the stock is Rs. 30. The amount of the profit
made by the option holder is Rs. ___________
a. 325
b. 250
c. 150
d. 100
1. D
2. D
3. D
4. C
5. C
6. D
7. B
8. C
9. B
10.A
11.A
12.D
13.A
14.D
15.B
16.C
17.A
18.A
19.B
20.D
21.A
22.C
23.A
24.D
25.C
26.B
27.D
28.D
29.C
30.D
31.D
32.D
33.B
34.C
35.C
36.D
37.B
38.B
39.A
40.D