ADL 54 Equity Research & Portfolio Management V2

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?
Question 2. (i) Discuss the dematerialisation and rematerialisation processes in
NSDL?
(ii) Stock market indices are the barometers of the stock market
Discuss?
(iii) How can increasing short interest give a bullish interpretation Why?
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 statius of the industry and
gives the clue to entry and exit for investors Elucidate.
Question 4. Stocks L and M have yielded the following returns for the past two
years.
Years
Return
%

L
M

1995
12
14

1996
18
12
(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
Question 5. 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.

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.
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?
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.
Year
Cash Flow (Rs.000)

1
(2,000)

2
(2,000)

3
200

2,300

5
4,100
Sundaram Ltd., currently has 1,00,000 shares in issue. The dividend just paid
was Rs.25 per share. In the absence of the above investment, dividends are
expected at this level for the next 3 years, but will then demonstrate perpetual
growth of 15 percent p.a. Sundaram finance Ltd. is currently all equity financed
and the required rate of return of the equity investor is estimated to be 18
percent. The only possible way of financing the investment is, therefore, to
reduce the dividend payments made in the next 2 years. 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.
What will be the present market price? What will be the market price after the
acceptance of the investment (assuming the market knows the dividend changes
that will result from the investment using a dividend valuation model?)
Case Study
EQUITY RESEARCH
Mr. Prashant Gupta is interested in investing in equity shares of Infosys and
Hamdard. Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven
people with US$ 250. Today, it is a global leader in the next generation of IT
and consulting with revenues of over US$ 4 billion. It offers span business and
technology consulting, application services, systems integration, product
engineering, custom software development, maintenance, re-engineering,
independent testing and validation services, IT infrastructure services and

business process outsourcing. Hamdard (Wakf) Laboratories, India is a famous

pharmaceutical company in India known for its Unani and Ayurvedic products. It
is the worlds largest manufacturer of Unani medicinesSome of its more famous
products include Safi, Sharbat Rooh Afza, Cinkara, Roghan Badam Shirin and
Pachnol. It is associated with Hamdard Foundation, India. Being conservative in
nature, he wants to determine the risk associated with investments. In specific
terms, he wants to seek data related to both levered and unlevered beta of these
companies. He approaches Nitin Shah, a financial consultant to do the needful.
Nitin has collected the relevant information detailed below:
Number(MONTHS)
INFOSYS*
HAMDARD*
S&P CNX NIFTY**

1
0.1455
0.0432
0.0654

2
0.1291

0.307
0.1536

3
-0.1036
-0.0498
-0.0749

4
-0.0643
-0.0369
0.0473

5
-0.0673
-0.0272
-0.0178

6
0.1361
0.0286
-0.0291

7
-0.0111
-0.1088
-0.1465

8
0.0452
-0.1338
0.0194

9
0.0277
0.0913

0.0663

10
0.0581
0.011
-0.0022

11
0.0313
0.0581
0.0854

12
0.1021
0.1043
0.0127

13

0.1652
0.0876
0.0914

14
-0.0237
0.0617
0.0604

15
-0.0581
0.0877
-0.0099

16
-0.0077
0.14
0.0119

17
-0.0401
0.0369
-0.008

18
-0.0589
0.0473
-0.0605

19
0.1335
0.1054
0.0746

20
0.0693

0.0249
0.0596

21
-0.0391
0.1082
0.048

22
-0.0086
0.048
0.0378

23
0.0196
0.068
0.0813
(i) Monthly returns on equity shares of Infosys and Hamdard for a period

of 2 years (w.e.f. October 2006 to September 2008) along with portfolio of S&P
CNX NIFTY.
(ii) Return on 364-days treasury bills issued by Government of India for
the period 2007-08 is 5.15 per cent per annum and 0.419 per month. This rate is
to be used as a proxy for risk-free rate of return.
(iii) Debt-equity ratio (based on the average of 2004 to 2008) is 1.6 per
cent for Wipro and 31.4 per cent for Dabur.
(iv) Corporate tax is 35 per cent.
Question:
Compute the beta and interpret it for Prashant. Examine different circumstances
with analysis of data.
Assignment C
S. No.
Question
A
B
C
D

1
Which of the following is /are true?
All investments are speculative by nature

Genuine investments involve calculated risks which are consistent with the
expected returns
The ultimate objective of an investment or speculative stock is to increase the
terminal wealth of the person concerned
Both b and c above

2
Which of the following is not an investment constraint?
Liquidity
The absence of the need for regular income
the preferred time horizon
Risk tolerance

3
A straight debenture is one which
Offers straight interest payments and is redeemed at par
Can be transferred by simple endorsement and delivery
Does not have a charge on any of the companys assets

Is automatically converted into a share at maturity

4
The issuing company has to create a Debenture Redemption Reserve up to _________
of the amount of debentures to be redeemed, before the date of redemption
10%
25%
30%
50%

5
Which of the following is not a non-security form of investment?
National savings scheme
Purchase of gold and art objects
Bank deposits
Corporate fixed deposits

Corporate fixed deposits

Are secured by the fixed assets of the issuing company
Have no upper limit on the interest rate they offer
Have a minimum maturity of 3 years
Cannot exceed 10% of the share capital plus free reserves

7
The threshold limit for total FII investments in an Indian company is
10%
24%
30%
none

8
Risk(s) affecting all the securities in the market is/are
Risk due to variability in returns due to changed investors expectations
Financial risk
Inflation risk

both a & c

9
The risk for the whole market as measured by Beta is
1
0
-1
Greater than 1

10
Of the following, systematic risk encompasses
Business risk
Inflation risk
Interest rate risk
Both b and c

11
Securities which are plotted above the SML line are

Under priced
Over priced
Favourable investments
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
1.55
1.75
1.85
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
16%
14%

12%
11.30%

14
The characteristic line established the relationship between
Return on a security and its beta
return on a security and its standard deviation
Return on the security and return on the market
Risk of the security and risk of the market

15
Which of the following statements is true?
Slope of SML is known as beta
Slope of CML is known as beta
CML includes inefficient portfolios
CML is a relationship between total risk and required return.

16

Government securities are free from

Default risk
Purchasing power risk
Interest rate risk
Reinvestment risk

17
Riskiness of a security in the context of security analysis essentially means
Variability of the securitys returns
Variability of returns above a benchmark mentioned by clients
Variability of returns below a benchmark mentioned by clients
Market risk

18
Market Indicators are employed in
Studying the behavior of the stock market
Evaluating the performance of the portfolios
Calculating betas of the securities

All of the above

19
As the business cycle enters the initial phase of economic recovery the stock
prices generally
Decline
Maintain the same trend as before
Rise
Rise to an extent and then take a downturn

20
Cyclical industries are those
Which experience high growth rates when economy is booming
Which perform irrespective of the economic conditions
Which experience downtrend when economy is in recession
Both a and c

21

High growth rates in earnings and market shares is a characteristic of companies

which are in
Maturity stage
Expansion stage
Pioneering stage
Declining stage

22
Which among the following is not volatile?
Cyclical growth industries
Growth industries
Cyclical industries
Defensive industries

23
In a balance sheet, equity and fixed assets are expressed in terms of their
Market value
Cost

Book value
Replacement value

24
The measurement of leverage is
PAT/Equity
Equity/Debt
Total assets/Equity
Total assets/Debt

25
Which of the following is/are cyclical industries?
Steel and Iron
Construction
Shipping
Cement

26

An industry in the expansion stage of its life cycle is indicated by

High P/E ratios
High dividend pay out ratios
High dividend yield
High investment in R & D

27
A business division with high growth but low relative market share is referred
to as a
Cash cow
Profit center
Question Mark
Star

28
during an inflationary period a company can artificially show higher profits by
Moving from FIFO and LIFO method of inventory valuation
Moving from LIFO to FIFO method of inventory valuation

Shifting from FIFO to the weighted method of inventory valuation

None of the above

29
An industry in the growth stage of its life cycle is indicated by
High P/E ratios
High dividend pay out ratios
High dividend yield
High investment in R & D

30
Which of the following is not an entry barrier?
Profit differentiation
Switching costs
Capital requirements
Low value addition

31

For a symmetrical triangle to be formed in a series of rallies

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

32
If a vertical rally or decline comes to a temporary halt to consolidate the
gain/loss after which the prices move in the same direction, give rise to
Flag
Rectangle
Gap
Both a and b

33
Which of the following is a measure of momentum against itself?
Relative strength indicator
Rate of change

MACD
Stochastic

34
In a technical analysis the exponent value for calculating a 10 day Exponential
Moving Average will be
0.2
0.1
2
20

35
In technical analysis the odd-lot theory is a classic example of
Oscillator
Breadth of market indicator approach
Contrarian opinion theory
Dow Theory

36
The argument that when stock prices increase, the closing prices have a tendency
to be closest to the peaks of the period, forms the basis of
Exponential moving average
Confidence index
Elliott wave theory
Stochastic

37
Which of the following best measures the strength of market advances of
declines?
Moving average analysis
Stochastic
Gap analysis
Breadth of market indicators

38
Which of the following is an assumption of technical analysis?

market value is determined by the interaction of different judgmental value

parameters
Supply and demand are governed by factors which are only rational
Stock prices tend to fluctuate widely over appreciable period of time and hence
cannot be predicated
Chart patterns tend to repeat themselves

39
An investor buys an option contract for a premium or Rs. 200. The exercise price
is Rs. 20 and the current market price of the share is Rs. 17, if the share
price after three months reaches Rs. 25, what is the profit made by the option
holder on exercising the option. Contract is for 100 shares. Ignore the
transaction charges
Rs. 200
Rs. 250
Rs. 300
Rs. 350

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. ___________
325
250
150
100