8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 1/13

Assignment Assessment Report

Campus: MUMBAI Year/semester 2011

Level: PCLII FIN Assignment Type ASSIGNMENT A

Module Name: ERST Assessor’s Name AMIT ASWANI

Student’s Name: Reqd Submission Date 11.02.2011

e-mail id & Mob No Actual Submission Date

Stream BUSINESS Submitted to : REENA RAGHAVAN

Certificate by the Student:

Plagiarism is a serious College offence.

I certify that this is my own work. I have referenced all relevant materials.

(Student’s Name/Signatures)

Expected Outcomes Assessment Criteria Grade based

on D,M,P,R 

system

Feedback 

General ParametersClarity Clear understanding of 

the concept

Analytical Thinking- Ability to analyze the problem realistically

Research Done- Research carried out to

solve the problem

Formatting &

Presentation-

Concise& clear 

thinking along with

 presentation

Subject Specific Parameters

1.

2.

3.

Assignment Grading Summary (To be filled by the Assessor)

OVERALL ASSESSMENT GRADE:

TUTOR’S COMMENTS ON

ASSIGNMENT:

SUGGESTED MAKE UP PLAN

(applicable in case the student is asked

to re-do the assignment)

REVISED ASSESSMENT GRADE

TUTOR’S COMMENT ON REVISED

WORK (IF ANY)

Date: Assessor’s Name / Signatures:

Grades Grade Descriptors Achieved Yes/No (Y / N)

P A Pass grade is achieved by meeting all the requirements defined.

M Identify & apply strategies/techniques to find appropriate solutions

D Demonstrate convergent, lateral and creative thinking.

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 2/13

(i) CAPM formula = E(Rs) = R f  +

b [E (Rm) – Rf ].

Where,

E(Rs) = Expected rate of return of the security (OR) the cost of 

equity

Rf  = risk free returnsE(Rm) = market rate

of return b = Beta

co-efficient given 1.4

Substituting thevalues

E(Rs) = 10 + 1.4

(15% – 10%) E(Rs)

=17%

Applying Dividend Growth Model 

D1 / P0 + g,Where D1, is dividend per share in year 1, g is growth rate of dividends,

P0 = Market price/share in year 0.Expected Returns being 0.17, we can make the equation as

0.17 = 4 (1.08) / P0 + 0.080.09 =4 (1.08) / P0

P0 = 4 (1.08) = 0.09= Rs. 48Question 1(a)(ii)

My advice for purchase for the share:-- Stock price is less than the CAPM.

- The Actual Market price is 36 which is lower than 48

- Stock would give more return than the actual returns

- Investor should BUY  the stock

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 3/13

Question 1(b)

Securities Return (%) Risk (%) Risk : Return PreferenceA 8 4 0.67:0.34 I

B 8 5 0.61:0.38 III

C 12 12 0.50:0.50 VI

D 4 4 0.50:0.50 V

E 9 5 0.64:0.35 II

F 8 6 0.57:0.42 IV

Rationally, Security E is an ideal choice since the risk is lesser with the promised return

as compared with other securities.

(ii)Assuming a perfect correlation, if the investor invests 75% in security A & 25% insecurity C then:

The risk involved in the said portfolio will be:

σˆ2 == (0.75)^2 * (0.04)^2 + (0.25)^2 * (0.12)^2 + 2*0.75*0.25*0.04*0.12*2.9

= 0.56*0.00016+0.0625*0.0144+0.00522

= 0.000896+0.009+0.00522

= 0.015 = 1.5%

Therefore the risk will be 1.5%

And the expected return of the said portfolio will be:

E(Rp) = W1.E(R1)+W2. (1-w2) E(R2)= 0.75(8) + 0.25(12)

= 6 %+ 3%

= 9%

Therefore, the expected return would be 9%

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 4/13

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 5/13

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 6/13

CASE STUDY

The functioning of the stock exchange.

Although the stock exchange market has multiple functions, its main activities are two:

• To promote the savings and for them to be canalized towards of carrying throughinvestment projects that otherwise wouldn’t be possible you need that the issuing

institution of the securities to be admitted for quoting. The negotiations will be

done on the primary market.

• To provide liquidity to the investors. The investor can recuperate the money

invested when needed. For it, he has to go to the stock exchange market to sell the

securities previously acquired. This function of the stock market is done on the

secondary market.

Other functions of the stock exchange market as an organization are:

• To guarantee the legal and economic security of the agreed contracts.

• To provide official information about the quantities that are negotiated and of the

quoted prices.• To fix the prices of the securities according to the fundamental law of the offer 

and the demand.

Specifying a bit more and centering on the two main agents that intervene in the market,

investors and companies, we could do the following classification:

Functions done by the stock exchange market in favor of the investor:

• It permits him the access to the profitable activities of the big companies.• It offers liquidity to the security investments, through a place in which to sell or 

 buy securities.• It permits for the investor to have a political power in the companies in which he

invests its savings due that the acquisition of ordinary shares gives him the right

(among other things) to vote in the general shareholders meetings of the company

in question.

• It offers the possibility of diversifying your portfolio by enlarging the field of 

strategy of investments due to alternative options, as could be the derived market,

the money market, etc.

With respect to the function done by the stock exchange market in favor of thecompanies:

• It supplies them with the obtaining of long-term funds that permits the company

to make profitable activities or to do determine projects that otherwise wouldn’t

 be possible to develop for lack of financing. Also, this funding signifies a less costthan if obtained at other channels.

• The securities quoted at the stock exchange market usually have more fiscal

 purpose advantages for the companies.

• It offers to the company’s free publicity, which in other way would supposeconsiderable expenses. The institution is objecting of attention of the media

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 7/13

(television, radio, etc.) in case any important change in its owners (the share

holders).

Processes involved in listing of a stock instock exchange:

Listing means admission of securities to dealings on a recognised stock

exchange. The securities may be of any public limited company,Central or State Government, quasi governmental and other financialinstitutions/corporations, municipalities, etc.

 The objectives of listing are mainly to :

• provide liquidity to securities;• mobilize savings for economic development;• protect interest of investors by ensuring full disclosures.

 The Bombay Stock Exchange (BSE) has a dedicated Listing Department

to grant approval for listing of securities of companies in accordancewith the provisions of the Securities Contracts (Regulation) Act, 1956,Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956,Guidelines issued by SEBI and Rules, Bye-laws and Regulations of BSE.

BSE has set various guidelines and forms that need to be adhered toand submitted by the companies. These guidelines will help companiesto expedite the fulfillment of the various formalities and disclosurerequirements that are required at various stages of 

• Public Issues

o Initial Public Offeringo Further Public Offering

• Preferential Issues• Indian Depository Receipts• Amalgamation• Qualified Institutions Placements

A company intending to have its securities listed on BSE has to complywith the listing requirements prescribed by it. Some of therequirements are as under :

I Minimum Listing Requirements for New Companies

IIMinimum Listing Requirements for Companies already Listed on otherStock Exchanges

IIIMinimum Requirements for Companies Delisted by BSE seeking relistingon BSE

IV Permission to Use the Name of BSE in an Issuer Company's Prospectus

V Submission of Letter of Application

VI Allotment of Securities

VII  Trading Permission

VIII Requirement of 1% Security

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 8/13

IX Payment of Listing Fees

X Compliance with the Listing Agreement

XI Cash Management Services (CMS) - Collection of Listing Fees

[I] Minimum Listing Requirements for New Companies

 The following eligibility criteria have been prescribed effective August1, 2006 for listing of companies on BSE, through Initial Public Offerings(IPOs) & Follow-on Public Offerings (FPOs):

1. Companies have been classified as large cap companies andsmall cap companies. A large cap company is a company with aminimum issue size of Rs. 10 crore and market capitalization of not less than Rs. 25 crore. A small cap company is a companyother than a large cap company.

a. In respect of Large Cap Companies

i. The minimum post-issue paid-up capital of the

applicant company (hereinafter referred to as "theCompany") shall be Rs. 3 crore; and

ii. The minimum issue size shall be Rs. 10 crore; andiii. The minimum market capitalization of the Company

shall be Rs. 25 crore (market capitalization shall becalculated by multiplying the post-issue paid-upnumber of equity shares with the issue price).

 b. In respect of Small Cap Companies

i. The minimum post-issue paid-up capital of theCompany shall be Rs. 3 crore; and

ii. The minimum issue size shall be Rs. 3 crore; andiii. The minimum market capitalization of the Company

shall be Rs. 5 crore (market capitalization shall becalculated by multiplying the post-issue paid-upnumber of equity shares with the issue price); and

iv. The minimum income/turnover of the Company shallbe Rs. 3 crore in each of the preceding three 12-months period; and

v. The minimum number of public shareholders afterthe issue shall be 1000.

vi. A due diligence study may be conducted by anindependent team of Chartered Accountants orMerchant Bankers appointed by BSE, the cost of which will be borne by the company. Therequirement of a due diligence study may be waivedif a financial institution or a scheduled commercialbank has appraised the project in the preceding 12months.

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 9/13

 

2. For all companies :

a. In respect of the requirement of paid-up capital and market

capitalization, the issuers shall be required to include inthe disclaimer clause forming a part of the offer documentthat in the event of the market capitalization (product of issue price and the post issue number of shares)requirement of BSE not being met, the securities of theissuer would not be listed on BSE.

b. The applicant, promoters and/or group companies, shallnot be in default in compliance of the listing agreement.

c. The above eligibility criteria would be in addition to theconditions prescribed under SEBI (Disclosure and InvestorProtection) Guidelines, 2000.

[II] Minimum Listing Requirements for Companies already Listed onOther Stock Exchanges

  The listing norms for companies already listed on other stockexchanges and seeking listing at BSE, made effective from August 6,2002, are as under:

1. The company shall have a minimum issued and paid up equitycapital of Rs. 3 crore.

2. The company shall have a profit making track record for the

preceding last three years. The revenues/profits arising out of extra ordinary items or income from any source of non-recurringnature shall be excluded while calculating the profit making trackrecord.

3. Minimum net worth shall be Rs. 20 crore (net worth includesequity capital and free reserves excluding revaluation reserves).

4. Minimum market capitalisation of the listed capital shall be atleast two times of the paid up capital.

5. The company shall have a dividend paying track record for atleast the last 3 consecutive years and the dividend should be atleast 10% in each year.

6. Minimum 25% of the company's issued capital shall be with Non-Promoter shareholders as per Clause 35 of the ListingAgreement. Out of above Non-Promoter holding, no singleshareholder shall hold more than 0.5% of the paid-up capital of the company individually or jointly with others except in case of Banks/Financial Institutions/Foreign InstitutionalInvestors/Overseas Corporate Bodies and Non-Resident Indians.

7. The company shall have at least two years listing record with anyof the Regional Stock Exchanges.

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 10/13

8. The company shall sign an agreement with CDSL and NSDL fordemat trading.

[III] Minimum Requirements for Companies Delisted by BSE seekingRelisting on BSE Top

Companies delisted by BSE and seeking relisting at BSE are required to

make a fresh public offer and comply with the extant guidelines of SEBIand BSE regarding initial public offerings.

[IV] Permission to Use the Name of BSE in an Issuer Company'sProspectus

Companies desiring to list their securities offered through a publicissue are required to obtain prior permission of BSE to use the name of BSE in their prospectus or offer for sale documents before filing thesame with the concerned office of the Registrar of Companies.

BSE has a Listing Committee , comprising of market experts, whichdecides upon the matter of granting permission to companies to usethe name of BSE in their prospectus/offer documents. This Committeeevaluates the promoters, company, project , financials, risk factors andseveral other aspects before taking a decision in this regard.

Decision with regard to some types/sizes of companies has beendelegated to the Internal Committee of BSE.

[V] Submission of Letter of Application

As per Section 73 of the Companies Act, 1956, a company seekinglisting of its securities on BSE is required to submit a Letter of Application to all the stock exchanges where it proposes to have itssecurities listed before filing the prospectus with the Registrar of Companies.

[VI] Allotment of Securities

As per the Listing Agreement, a company is required to complete theallotment of securities offered to the public within 30 days of the dateof closure of the subscription list and approach the Designated StockExchange for approval of the basis of allotment.

In case of Book Building issues, allotment shall be made not later than15 days from the closure of the issue, failing which interest at the rateof 15% shall be paid to the investors.

[VII] Trading Permission Top

As per SEBI Guidelines, an issuer company should complete theformalities for trading at all the stock exchanges where the securities

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 11/13

are to be listed within 7 working days of finalization of the basis of allotment.

A company should scrupulously adhere to the time limit specified inSEBI (Disclosure and Investor Protection) Guidelines 2000 for allotmentof all securities and dispatch of allotment letters/sharecertificates/credit in depository accounts and refund orders and forobtaining the listing permissions of all the exchanges whose names are

stated in its prospectus or offer document. In the event of listingpermission to a company being denied by any stock exchange where ithad applied for listing of its securities, the company cannot proceedwith the allotment of shares. However, the company may file an appealbefore SEBI under Section 22 of the Securities Contracts (Regulation)Act, 1956.

[VIII] Requirement of 1% Security

Companies making public/rights issues are required to deposit 1% of the issue amount with the Designated Stock Exchange before the issue

opens. This amount is liable to be forfeited in the event of thecompany not resolving the complaints of investors regarding delay insending refund orders/share certificates, non-payment of commissionto underwriters, brokers, etc.

[IX] Payment of Listing Fees

All companies listed on BSE are required to pay to BSE the AnnualListing Fees by 30th April of every financial year as per the Schedule of Listing Fees prescribed from time to time.

With respect to the Listed Stock on the Exchange, 'Book value' and 'Market value'

of the Stock and Based on the following factors:

Market value and intrinsic value are broad terms used to define severaldifferent things in the financial world. They are most commonly used todescribe the implicit and explicit valuation of publicly-tradedcompanies, but can also be used to describe the valuation of stock

options.

Stock Market Value refers to the value of stocks traded in a particularmarket. In specific cases the market capitalization and the marketvalue of debt attributed to a particular stock is its Total Market Value.

Generally the value of a particular stock is measured at different levelsby different methods of analysis, but it is important to note that thereare two basic parameters to check the value of stocks. They are:

Book Value

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 12/13

 The term used in the UK for Book Value is ‘Net Asset Value’ whichalmost completely explains the meaning of term in brief. Book Value isderived from the balance sheet of a company, where its overall worthis reflected. In other words it is also the fundamental worth of thecompany - the term ‘company fundamentals’ is widely used in thestock market.

According to Investopedia, “In personal finance, the book value of an

investment is the price paid for a security or debt investment. When astock is sold, the selling price less the book value is the capital gain (orloss) from the investment”.

Market Value

Like with stocks, the market value of an option is simply the priceanybody is willing to pay for it in the open market. This price isinfluenced by four core variables: the strike price of the option, howmuch time it has left until expiration, whether or not it has any intrinsicvalue and the volatility of the underlying stock.

  The market value of a stock is determined on the basis of theinvestor’s impression of the potential of a company’s stock to performwell in the medium to long term. It is widely used across differentindustrial and commercial segments to explain the long-term potentialvalue of a particular commodity. The term has particularly widespreaduse in the real estate industry.

Market value takes into account the image formed by the company inits target market. This may sometimes result in the overpricing of 

certain stocks but overall it gives a fair idea about the value of thestock

 The market value of a security is what anyone is willing to pay for it inthe open market. Depending on broader market conditions and thepopular opinion of investors at any given time, a company's marketvalue can either be much higher or lower than its fundamental andintrinsic value.

Intrinsic Value

Intrinsic value is a somewhat more nebulous, subjective term thanmarket value. It typically refers to the value of a company's intellectualproperty like copyrights, trademarks and patents or other intangiblethings like business models, personal contacts and complex

8/3/2019 Erst a Assignment

http://slidepdf.com/reader/full/erst-a-assignment 13/13

proprietary technology that may be difficult to properly value in theopen market

 This is another example of an analysis that includes all aspects of acompany’s business, both in term of its tangible and intangible assets.It is called Intrinsic value because it goes beyond the book value inquantifying the tangible assets and beyond the market value inquantifying intangible assets. Investors seeking intrinsic value in a

stock expect the value of their investments to exceed the existingmarket value of the stock.

 The stock market has different analytical methods to value stocks andother investment options in the market. Accordingly different levels of values evolved in relation to the performance of different stocks,options and futures apart from other investment options such as debtinstruments.

Investment Considerations

Prominent investors like Benjamin Graham and Warren Buffett madesome of their greatest profits by purchasing fundamentally-sound,well-run companies when their market value was running at asubstantial discount to their intrinsic value. They were able to look pastthe near-term problems and bad news affecting the firms and realizethat once ephemeral issues were taken care of, they would be viable,profitable enterprises.