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 firm’s 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 firm’s 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

4

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 world’s 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 company’s 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

6

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 security’s 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