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Section A : Basic Concepts (30 Marks)
• • • • This section consists of questions with serial number 1 - 30. Answer all questions. Each question carries one mark. Maximum time for answering Section A is 30 Minutes.
1. Which of the following statements is false with respect to Support and Resistance Lines under trend analysis? (a) (b) (c) (d) (e) It is an important tool in confirming a reversal, in forecasting the course of prices, and in making appropriate price movement Prices are said to remain in a ‘congestion zone’ as long as they fluctuate in narrow ranges within a support and resistance level The higher the volume accompanying the confirmation of a support or resistance level, the more its significance The direction of break out from a congestion zone can be predicted in advance The speed and extent of the previous move determines the significance of a support or resistance level.
2. Which of the following statements is/are false for duration of a bond? As the term to maturity increase the number of coupon payment increases. Duration increases as the redemption payment is extended, but the weightage of the redemption decreases as the term to maturity increases. III. The longer the term to maturity of a coupon paying bond the lesser the difference between its term to maturity and duration. IV. A bond which pays interest for a finite period, the duration is equal to its term to maturity. (a) (b) (c) (d) (e) Only (I) above Only (III) above Both (I) and (IV) above Both (III) and (IV) above (II), (III) and (IV) above. I. II.
3. A 3–year bond is currently yielding 8.4%, while a 4–year bond is currently yielding 8.89%. Assume that the expectations theory holds good, the rate for 1-year bond three years from now is (a) (b) (c) (d) (e) 10.37% 11.47% 12.79% 15.72% 18.04%.
4. Market Extraction Method is one of the methods to derive the capitalization rate of real assets. Which of the following statements is/are true with respect to Market Extraction Method? I. II. In this method, net operating income is divided by sales price to get the capitalization rate. In this method, the rates on equity as well as debt financing rates are weighted according to their proportions to calculate the capitalization rate. III. In this method, the capitalization rate is the sum of the risk free rate and risk premium. IV. In this method comparable property is selected. (a) (b) (c) (d) (e) Only (I) above Only (II) above Both (I) and (IV) above Both (II) and (III) above Both (III) and (IV) above.
5. Which of the following statements is not a condition for perfect immunization? (a) The term structure is upward sloping
Which of the following is true. (III) and (IV) above All (I). If the company is currently paying a dividend of Rs.24% 11. 6.4. Residual risk is the unsystematic risk. a crossover by the price line is a fairly reliable indicator of trend reversal A simple moving average constructed over a long time span lags the price trend Technical analysts observe moving averages less for crossovers than for the changes in direction When the moving average rises above the price line. The dividend yield of DSL is 5.5% p. (II). 7..5 per share and expected to grow at a constant rate of 8.(b) (c) (d) (e) The duration of a bond is matched with the investment horizon There is only a time change in interest rate during the investment horizon The investment is made in default free bond Buy-and-hold strategy is adopted.a.28%. The residual risk in a well-diversified portfolio is equal to the average co-variance of the securities in the portfolio.Which of the following methods does not measure the Market breadth? (a) (b) (c) High-low statistics Percentage of stock over moving average Rate of change index . (a) (b) (c) (d) (e) Both (I) and (II) above Both (II) and (III) above (I). (II) and (III) above (I).Fund used in order to increase the size of the value of the portfolio and benefit the shareholders by gains exceeding the cost of the borrowed funds is called (a) (b) (c) (d) (e) Growth funds Leveraged funds Balanced funds Income funds Specialized funds. III.19% 10. Residual risk represents the market risk. Pritam Chauhan holds a stock of Deon Software Ltd. IV. 11. the required rate of return is (a) (b) (c) (d) (e) 14.Which of the following statements is false with respect to Security Market Line (SML)? (a) (b) (c) (d) (e) SML represents the normal trade-off between return and risk The vertical distance of the security’s plot on the graph is called the beta of the security Ex-post SML tests the asset pricing theories Ex-post SML is used to evaluate the performance of portfolio managers Ex-ante SML indentifies the undervalued stocks.41% 9. a reversal in bullish trend is signaled.50%. II. 9. Which of the following statements is not true about moving averages? (a) (b) (c) (d) (e) A moving average represents a smoothened trend and therefore act as a support/resistance line If the moving average is flat or has already begun to change direction. if exit barriers are low and entry barriers are high in the industry? (a) (b) (c) (d) (e) Returns are low and stable Returns are high and stable Returns may vary depending on industry selected Returns are high and risky Returns are low and risky. Which of the following statements are true about residual risk? I. Residual risk cannot be diversified. (DSL). 12. 10. 8. (III) and (IV) above. Mr.47% 12.
a.125. (a) (b) (c) (d) (e) 14. Runaway gaps are also called measuring gaps.18. II.137. Currently the company pays dividend of Rs. Only (I) above Only (III) above Both (I) and (IV) above Both (II) and (III) above Both (II) and (IV) above. A series of runaway gaps is an indication of exhaustion gap. (a) (b) (c) Only (I) above Both (I) and (II) above Both (II) and (III) above . 16..53 Rs.Which of the following interest rate theory states that. Breakaway gaps are created when price breaks out of a price pattern. Thereafter the dividend is expected to grow at a constant rate of 6. 13. Gaps cannot occur in a bar chart. “It is not necessary that the liquidity premium should increase at a uniform rate with maturity”? (a) (b) (c) (d) (e) Liquidity Premium Theory Pure Expectations Theory Preferred Habitat Theory Segmentation Theory Loanable Fund Theory. III. It is basically used as a tool to reconcile value with market price.79 Rs. 18.a. IV.140. The stock of MFL has beta of 1. III. Sutanu Sanyal has purchased a stock of Maxi Fabrics Ltd.Which of the following statements is/are false about ‘gaps’? I.58 Rs. which can be used to convert differences between the values and the prices.8..Which of the following statements is/are false with respect to Option-Adjusted-Spread (OAS)? I.4. 17.163. (e) 15.Mr. the resulting spread is called option adjusted spread.A Floating Rate Notes (FRNs) where the reference rate is adopted as a percentage of the value of reference index is called (a) (b) (c) (d) (e) Capped FRNs Deleveraged FRNs Perpetual FRNs Inverse FRNs Mismatch FRNs. and the expected market return is 12% p. If the risk-free rate of return is 7.(d) (e) Diffusion index Advance-Decline lines. and such breakouts are more valid than those occurring without a gap.5% p.21 Rs.5 per share. the higher the OAS.5% p.a.159. the stock’s expected price four years from now is (a) (b) (c) (d) (e) Rs. The cash flows of the callable bond are adjusted to reflect the embedded option. II. (MFL).Which of the following statements is false? (a) (b) (c) (d) Current yield is measured by comparing the coupon interest with prevailing market price Current yield of bonds selling at premium would be more than the coupon interest rate Calculating the IRR of a coupon payment and redemption value gives the true return on the bond which is known as the yield to maturity Realized yield can be stated as the rate that equates the future value of the purchase price to the total cash flow realized from the bond The realized yield will always lie between the yield to maturity and the reinvestment rate. IV. It is a measure of the yield spread. The higher the expected interest rate volatility.
50 and number of shares per warrant is 3.15 years 8.18 years.The current market price of the stock of Surya Oils Ltd. If exercise price of warrant of (SOL) is Rs. then the maximum value of the warrant is (a) (b) (c) (d) (e) Rs. 20. (III) and (IV) above.50.78. 421. It measures every movement in prices. pay-out ratio and risk.21 years 6. 265. (III) and (IV) above All (I). 19.80 41. and face value of Rs.79 Rs. the modified duration of the bond is (a) (b) (c) (d) (e) 5. II. (II) and (IV) above (II). (II) and (III) above (I).50 Rs. 115. It records changes in prices larger than a specific amount.(d) (e) (I). IV. 24. (SOL) is Rs.100. If he had performed the test at 10% level of significance.Which of the following statements are false towards Point and Figure Chart? I. 22. with a coupon rate of 11% p.The duration for a bond paying semi-annual coupon is 9. 132.15. (II).132.17.03 61. 397. 25. The standard error for the data concluded is 3.58 Rs.76 years 9. It concerns itself only with the measurement of prices.88.15 50.64 years. Kunal Shah has performed a runs test on the stock prices of Rola Pharmaceuticals Ltd.Which of the following statements is false regarding the Utility theory to risk return analysis? (a) (b) Total utility is an increasing function of wealth Investors’ utility function is quadratic . (III) and (IV) above.Which of the following statements is false under Cost approach towards valuation of real estate? (a) (b) (c) (d) (e) According to this approach.Which of the following statements is false for Price to Sales (P/S) ratio? (a) (b) (c) (d) (e) P/S ratio can never be negative P/S ratio are not so volatile as price to earning ratio It is an useful tool to examine the effects of changes in pricing policy and other corporate decisions P/S ratio are directly proportional to the required rate of return It can be estimated using earnings growth rate.a. (a) (b) (c) (d) (e) Both (I) and (III) above Both (I) and (IV) above (I).a.28 years 7. 23. The maturity of the bond is 12 years.Mr. value of a property is equal to the sum of the land value and the replacement cost of the building It is easy to quantify the functional and external obsolescence A developer would not raise any building without any expectation of return The rationale behind this approach is that any rational investor would not be ready to pay more than the cost of replacing the same building with an equivalent property Under this approach if the owner has leased the property he has partial ownership only.5% p. 21. It has a time dimension.50 Rs. III.58 38. He concluded that the numbers of positive and negative price changes are 39 and 28 respectively. the upper limit for the significance level is (a) (b) (c) (d) (e) 29. If the YTM of the bond is 9.
but still provides a fair return to the intermediaries for their services Full insurance efficiency is said to exist. END OF SECTION A .79. 28. Which of the following is not a salient feature of an efficient market? (a) (b) (c) (d) (e) Fundamental valuation efficiency is said to exist.Which of the following statements is false with respect to various types of mutual funds? (a) (b) (c) (d) (e) In performance funds. Return 14% 11% Variance 324 (%)2 178 (%2)2 Weight in the portfolio 0. if the price of an asset is neither undervalued nor overvalued Allocational efficiency is said to exist. on the price charts The significance of a pattern is a direct function of its size and depth.(c) (d) (e) There is a direct correspondence between rate of return and wealth.51 – 0. because the duration of a trend can be measured. Global Telecom Ltd.7 0. 27. just when the ability to identify the future strong performers is most valuable.44 + 0. 26.30 + 0. decline is indicated on relative basis only The pioneering stage may offer the highest potential returns. the investment is made in buying equity shares of small unseasoned companies with relatively high price-earnings ratio and higher price volatility Leveraged funds are used in order to increase the size of the value of the portfolio and benefit the shareholders by gains equal to the cost of the borrowed funds Real estate funds is of close ended type Money market funds are high liquid funds with very low risk and virtually no capital loss In specialty funds. the wealth so created is large Marginal utility is a decreasing function of wealth Expected utility function is a decreasing function of expected return. the stronger is the base of the new trend The shorter it takes for prices to break through a pattern. if the operating cost are minimum possible to participants. with no risk An industry evolves into the stabilization stage at which the growth begins to moderates.The reflection of true value of an asset in its price is an indicator to the existence of an efficient market. with a certain level of accuracy. industries are improving their product and perhaps increasing their prices In the industry life cycle. the co-efficient of correlation between the stocks is (a) (b) (c) (d) (e) – 0. the greater is the significance of the penetration Price patterns offer certain forecasting possibilities. if participants can adopt hedging as an effective tool against possible risk in future Information arbitrage efficiency is said to exist. 29.3 If the variance of the portfolio is 205(%)2. if the participants do not have any scope to reap abnormal profits using information that is of common knowledge. if the rate of return is high.Which of the following statements is true with respect to industry analysis? (a) (b) (c) (d) (e) At the pioneering stage it can be easy for security analysts to identify the likely survivors.79 + 0.Which of the following principles is false while analyzing price pattern in technical analysis? (a) (b) (c) (d) The longer a pattern takes to complete and greater the price fluctuations within the pattern. At the expansion stage of the cycle.Consider the following information: Stock Maze Telecom Ltd. if the market channelizes resources into projects where the marginal efficiency of capital adjusted for risk differences is lowest Operational efficiency is said to exist. (e) 30. the more substantial the ensuing move is likely to be The longer it takes for prices to move out of the pattern. the investment is made in equity shares of good track record companies which offer long term capital growth and provide handsome dividend.
5% and market risk premium is 13.5%.Security Analysis – I (MSF2D1) Section B : Problems (50 Marks) • • • • • This section consists of questions with serial number 1 – 5. and it is expected to remain same in the future. Mr. Mr. Detailed workings should form part of your answer.000 having a coupon rate of 8.28 0. b.937. you are required to compute: a.445 lakhs and numbers of shares outstanding is 2 lakhs. b. Answer all questions. Price to book value ratio of the share of MSL.5%. SGL bonds have AA+ credit rating. (%) 22 18 14 8 Redman Pharmalabs Ltd.50 for every 1 rupee of assets employed.Data for 15-days trend of securities traded on NSE is given below: (7 (2 marks) marks) . and comment on the same.120 minutes on Section B.1.3. and Redman Pharmalabs Ltd. (6 b. Calculate the yield to maturity. Kulkarni though of investing in SGL bonds. Calculate the betas of Surya Pharmalabs Ltd. At present the risk-free rate of return is 9.5% payable annually. The cost of equity will remain same in future. are overpriced or underpriced.50 for every 1 rupee of assets employed and it is expected to remain the same for the next 7 years. Calculate the proportion of systematic risk and unsystematic risk of the two stocks. Current net worth of the company is Rs.36 0. At present the company is able to generate sales of Rs. (2 2. You are required to: a. Assuming that the market is in equilibrium. duration and convexity of the bond. and after that the company is expected to generate sales of Rs.17 0.1.5% and is expected to remain at the same level for next 7 years. The net profit margin of the company is currently 7. Prakash Kulkarni who is very particular about the price of the bonds is planning to invest in long term fixed income securities.Marion Steel Ltd. (3 c. Marks are indicated against each question. after which it is expected to decrease to 5%. (MSL) is a major player in the steel industry. Do not spend more than 110 .19. 4.Starlight Granites Ltd. The industry is expected to maintain high growth for a period of 7 years after which it is expected to drop down. has made risk and return projections of the two stocks Surya Pharmalabs Ltd. At present the company is distributing 30% of its profit as dividend to shareholders. The dividend payout ratio of the company is expected to remain at the current level for a period of next 7 years after which it is expected to increase to 45%. (SGL) has recently issued 10–years Junk Bond with a face value of Rs. (%) 28 16 15 10 Market return (%) 19 16 12 4 The risk free rate of interest is 8.An analyst of Meriden Securities Ltd. Find out whether the shares of Surya Pharmalabs Ltd. (6 marks) marks) marks) marks) marks) Calculate the impact on the price of the bond as predicted both by duration and convexity if the required yield increases by 200 basis points. 50% of the assets of the company are financed by equity capital. 1. You are required to: a. The bond is currently trading at Rs. and Redman Pharmalabs Ltd.19 Surya Pharmalabs Ltd.4. (SPL) and Redman Pharmalabs Ltd. (RPL) which are as follows: Economic scenario Boom Growth Stagnation Stump Probability 0. (6 3. Price per share of MSL using Dividend Discount Model (DDM). The beta of the company is currently 2.
explain how listing of securities is advantageous to the company as well as to the investor. 7.7. what is your conclusion from the above two lines? (2 5. Short-period A-D line.22.50 respectively.5% convertible bond of face value Rs. b. You are required to calculate a. Enumerate how a warrant is advantageous to the company as well as to the investor. The investment value of similar non-convertible bond is Rs. END OF SECTION B ( ( ( ( 2 2 2 1 marks) marks) marks) mark) Section C : Applied Theory (20 Marks) • • • • 6. c. Also explain various types of listing of securities. d. After a period of 5 years on the choice of the investor each of these bonds can be converted into 30 equity shares of face value of Rs. Break even period. The current market price of the bond and the share are Rs. b. c.890 and Rs.55.1. ( Based on the above computations. This section consists of questions with serial number 6 . In this context. Marks are indicated against each question.10 at a premium of Rs.000. ( 10 marks) Admission of securities for trading on a stock exchange through a formal agreement between the stock exchange and the company is called listing. Premium over conversion value.Suvidha Biotech Ltd. Do not spend more than 25 -30 minutes on Section C. ( 10 marks) END OF SECTION C END OF QUESTION PAPER . The dividend per share is Rs. have issued earlier a 10. Premium over investment value. ( Long period A-D line.14 each.785. Answer all questions. Warrants are usually attached with bonds or preference shares to attract the investors.2. Conversion parity price of share.Days 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Advances 881 840 544 623 573 852 392 505 246 360 453 853 193 563 605 Declines 340 384 685 597 639 369 831 702 981 861 745 358 1032 645 602 Total number of securities traded 1255 1245 1253 1260 1257 1249 1258 1258 1248 1254 1250 1248 1250 1251 1255 2marks) 7marks) marks) You are required to calculate: a.
Hence option (d) is false.085) 81.5(1 + 0. Hence statement (IV) is false. D 7. Thus option (d) is the answer. Other statements are true. A 6. High Low. The residual risk in a well-diversified portfolio equals the average co-variance of the securities in the portfolio. three years from now = (1 + r3)3(1 + 3r1) = 10. 0. 81. risky returns High. Hence option (c) is the answer.47% 9. 1.37% r4 = 4 year rate today (1 + r4)4 3r1 (1.085 81. This is the amount of risk that cannot be diversified away no matter how much the diversification of the portfolio.5 Current Market price or.82 Dividend yield = D1 Current market price = K e − g 4. D 2. All other conditions are true with respect to perfect immunization. Hence statement (III) is false. C Statement II relates to Bond of Investment method.82 = k e − 0.055 = x or. stable Low barriers returns High. The longer the term to maturity of a coupon paying bond the greater the difference between its term to maturity and duration.82 ( ke – 0. Statements (I) and (IV) relates to Market Extraction Method. x = Rs.0889)4 = (1.8825 81. stable High returns Therefore.Suggested Answers Security Analysis – I (MSF2D1) Section A : Basic Concepts Answer Reason D The direction of breakout from a congestion zone cannot be predicted in advance. option (d) is the correct answer Let the current market price of the stock be x. Other statements are true. Residual risk is the systematic risk. representing the market risk. A Dividend per share 4.084)3(1 + 3r1) 4. Therefore. D 8. Technical analysts observe moving averages more for crossovers than for the changes in direction. Hence option (d) is the answer. Therefore. Option (b) is the correct answer. A r3 = 3 year rate today 3. option (a) is the correct answer. Statement III relates to Built-up method. Hence option (d) is the answer. risky returns . 5. B Exit barriers Low Entry Low. For perfect immunization term-structure should not be upward sloping but it should be flat.84 ke = 14. A bond which pays interest of a finite period has its duration less than its term to maturity.085) = 4.82ke = 11. 3r1 = 1 year rate.
0. Other statements are true. Hence option (b) is false.18 0. Thus option (b) is the answer. Other statements are true. Hence option (I) and (III) are false.7.5 × 3 = Rs.5)1. Thus option (b) is the answer. Fund used in order to increase the size of the value of the portfolio and benefit the shareholders by gains exceeding the cost of the borrowed funds is called leveraged funds. Expected utility function is an increasing function of expected return. All other statements are false. Value of the stock P4= D0(1+g)5/(ke . Hence option (b) is the answer. Hence statement (III) is false. The higher the expected interest rate volatility.159. D A Maximum value of the warrant = current market price of the stock × number of shares 132. Hence option (d) is false. It does not measure every movement in prices.138 . Hence option (b) is false. 14. Other statements are true. B 12.065) = Rs. Thus option (e) is the answer.397.8%.5 + (12 . Thus option (b) is the answer. An industry evolves into the stabilization stage at which the growth begins to moderates is a true statement. P/S ratio is directly proportional to net profit margin and inversely proportional to the required rate of return.15 At 10% level of significance α = 0. Hence statements (I) is false. . In deleveraged FRNs the reference rate is adopted as a percentage of the value of reference index. Hence option (e) is the answer. Thus option (a) is the answer.4 = 13.60 + 1. Hence option (e) is false. D YTM P 22. B 25. B 11. Hence option (c) is false.76 years 2 24. Current yield of bonds selling at premium would be less than the coupon interest rate Hence option (b) is false. Hence option (b) is the answer. 23.5(1. E E One of the drawbacks of cost approach is that it is difficult to quantify the functional and external obsolescence. Thus option (c) is the answer. Other statements are true.10.15) = 38. D D Modified duration = 1+ Where p is frequency of coupon payment.50 Point and Figure Chart does not have time dimension. A B Mean (µ )= n 1 +n 2 = 39+28 = 33.60 Standard error = σ = 3. Other statements are true.095 1+ = = 8. Return on equity (ke) = 7.65 Upper limit = µ + Zσ = 33. Hence option (c) is the answer.65(3. the lower the OAS. C B B C B C The vertical distance of the security’s plot on the graph from the SML is called the security’s alpha. Rate of change index method is used to measure the momentum and not market breadth. Other statements are true. 21.065)5/(0.80 20. Thus option (b) is the answer.53 A gap refers to the occurrence of an empty space in a bar chart between the prices of two consecutive trading sessions. 19. 9. 17. 13. 16. Preferred Habitat Theory states that it is not necessary that the liquidity premium should increase at a uniform rate with maturity. 26.01. Thus option (a) is the answer. 15. Z = 1.g) = 8. 2n 1 n 2 +1 2 × 39 × 28 +1 18.
where σi wi is variance of the stock is weight of the stock ρ12 is the correlation coefficient of two stocks.7 × 0. .86 ρ12 = 205 ρ12 = 29. Thus option (b) is the answer. Hence option (c) is the answer. B The longer it takes for prices to break through a pattern. B 28. 324 178 ρ12 0. the greater is the significance of the penetration. In the given case.32 + 2 × 174. Allocational efficiency is said to exist. Variance of the portfolio of two stocks is calculated as σ12 w12 + σ22 w22 + 2σ1σ2 ρ12 w1w2. All other statements are true.3 = 205 0. Hence option (b) is the answer. if the market channelizes resources into projects where the marginal efficiency of capital adjusted for risk differences is highest. C Leveraged Funds are used in order to increase the size of the value of the portfolio and benefit the shareholders by gains exceeding the cost of the borrowed funds. Hence option (b) is false.72 + 178 × 0. 324 × 0. Thus option (c) is false.30 C 30.27. Other statements are true. Other statements are true.78 + 100.
12 – 8. m 0.19 (10 – 19.69 = 13.86) (19 – 14.12% Expected return of RPL R RPL = 28 × 0.19 (8 – 16.78 = 0.28 (16 – 19.76 = 0.17(14 – 16.12) = 32.36 (22 – 16.12)2 = 29.932 × 29.28 (16 – 14.78 = 36.28 + 12 × 0.86) (12 – 14.01) (19 – 14.a.5) = 13.93 Cov RPL. Systematic risk of SPL β2SPL σ 2 m 2 2 b.57% RPL = 13.28 + 14 × 0.19 = 19.19 = 16.46% Cov SPL.17 + 10 × 0.79 – 36.79 = 73. = 0.01% σ 2 RPL = 0.12) = 27.01) (16 – 14.19 (4 – 14.12)2 + 0. m/ σ m = 27. Unsystematic risk = 49.12% σ 2 m = 0.01)2 + 0.36 + 16 × 0.01) (12 – 14.36 + 16 × 0.36 (28 – 19.86)2 = 26.12)2 + 0. m 0.79 = 26.86) (16 – 14.01) (4 – 14.5 + 0.17(12 – 14.86) (4 – 14.79(%)2 σ RPL = 7.19 = 14.17 + 8 × 0.17 = 98.01)2 = 49.19 (10 – 19.17(15 – 19.41(%)2 Systematic risk of RPL β2SPL σ 2 m = 1.41/26.112 × 29. stock of SPL is a defensive stock whereas stock of RPL is an aggressive stock.86)2 + 0.12) + 0. . Expected return of SPL RSPL = 22 × 0.17 = 1.01)2 + 0.31% Required rate of return of SPL Ri = Rf + β (Rm – Rf) = 8.12) + 0.Security Analysis – I (MSF2D1) Section B : Problems 1.86% σ 2SPL = 0.1(%)2 Proportion of Systematic risk SPL = 25.36 (28 – 19.12) + 0.12)2 + 0.36 + 18 × 0.12) + 0.19 (8 – 16.98/29. m/ σ m = 32.28 (18 – 16.17 – 25.10/49.43% RPL = 36.7/29.76(%)2 Unsystematic risk = 26.28 + 15 × 0.73% As the required rate of return is less than the expected return the stock of SPL is underpriced.36 (22 – 16.01)2 + 0.17(%)2 σ SPL = 5.28 (18 – 16.86)2 + 0.11 Thus betas of both the stock states that.76/26.70(%)2 Beta (βSPL) = Cov SPL.17 + 4 × 0.06% Expected market return R m = 19 × 0.69% Proportion of Unsystematic risk SPL = 0.86)2 + 0.17(14 – 16.78(%)2 σ m = 5.28 ((16 – 19.36 (19 – 14.17(15 – 19.69/49.98(%)2 Beta (βSPL) = Cov SPL.12) + 0.12) + 0.78 = 1.78 = 25.93 × (14.69(%)2 c.
19 = 85(PVIFA r% 10yrs) + 1000 (PVIFr% 10 yrs) At r = 9.19 = 7.19 PV (CF) × t (5) 77.11× (14.25 Therefore convexity = b.915.89 64.02 p = –D 1+k = –7.96 337.82% + 10. If the yield increases by 200 basis points.27% New bond price = 937.25 937.19 Duration of the bond Year (1) 1 2 3 4 5 6 7 8 9 10 10 CFt PV @ 9.31 45.03 41.02 2521. duration predicts the price change of ∆P ∆k 0.50 937.68 2960.29.19 (1– 0.5 + 1.19 (1 – 0.19 Duration = 6576.52 270.60 1620.8340 = 52751.62 141.64 3379.12 – 8.02 years n CFt 1 (t 2 + t ) 2 ∑ P (1 + i ) i =1 (1 + i )t Convexity = 1 1 = 2 (1 + i ) (1.9132 85 0.00 49.00 295.34 776.5% 85 (6. Yield to maturity 937.62 70.22 236.00 63250.30 403.12/937.6352 85 0.50 3773.02)2 =10.a.a.00 44385.29 × (0.Required rate of return of RPL Ri = Rf + β (Rm – Rf) = 8.817.86 315.4035 1000 0.4035 Total Price of the bond = 937.55%= –2.00 4035. (2) (3) 85 0.78 194.95 343.12 t2 + t (6) 2 6 12 20 30 42 56 72 90 110 110 (4) × (6) (7) 155.90 2.02 The convexity predicts the price change of Price change due to convexity = 1/2 × Price × Convexity × (Change in Yield)2 = ½ × 937.0227) = Rs.5298 85 0.24 425.00 6576.74 59.5) = 14.74% As the required rate of return is less than the expected return the stock of RPL is underpriced.19 = 56.8340 63250.02 1.82% New bond price = 937.4418 85 0.1282) = Rs.00 2071.2788) + 1000 (0.7617 85 0.55 34. 52751.5% PV (CF) (4) 77. Particulars Next 7 years After 7 years .92 3.5801 85 0.6956 85 0.21 328.55% The total price change = –12.095) 2 =0.12 37.13 54.095 = –12.88 1182.8340 85 0.4838 85 0.19 × 56.4035) = 937.19 × 0.
75% 45% 5% 4.a. price to book value ratio = 710.75 45 Calculation of Current EPS of the company: ROE = PAT/NW 0.50 50% 45% 24.Payout ratio) x ROE 30% 7.56 167.82 159.93 65.49 Terminal value at the end of 7th year = 586. of shares outstanding 445 = 4.54 89.233. 116.75 30 2 36.5 Therefore.97 1044.5 + 2.75 30 6 36. 2 = Rs.525 x 445 lakhs PAT = Rs.02 Value of the share 47.20 Short-period A-D line: Advances Declines Day Issues traded (A) (D) 1 1255 881 340 2 1245 840 384 3 1253 544 685 Net (A-D) 541 456 -141 Cumulative (A-D) 541 997 856 .19 313.63 / 2 = Rs.3785 1.63 lakhs EPS = PAT/No.222. = No.525 = PAT/445 lakhs PAT = 0.82 Calculation of Cost of equity = Ke = Rf + β (Rm – Rf) = 9.5 = 3.75 30 1 36.1(13.3785 1.02 + + + + 5+ 7 2 3 4 6 1. 4477.75% Calculation of price per share: Growth rate DPR (%) (%) 0 36.75 30 5 36.53 558.62 122.92 Net worth b.93 1.3785 + 65.3785 1.46 298. Book value per share of MSL Ltd.92/ 222.50 50% 52.54 89.60 229.73 1303.42 586.5 ) = 37.74 408.5% 36.3785 1.75 30 8 24.62 122.30 47.3785 1.75 30 7 36.56 167.75 218.75 30 3 36.66 763.5% 3.Pay-out ratio Net profit margin (a) Asset turnover ratio (b) NW/TA (c) ROE = (a x b) / (c) Growth rate (6) = (1.42 + 4477.75 30 4 36.19 313.85% Year EPS DPS 116. of shares outstanding = 233.2475) = Rs.3785–0. 710.60 229.49/(0.3785 =Rs.
16 -40.43 2609. Premium over conversion value = = 22.31 44.00 -1518.5) which is 31. Continued positive figure indicates a technically strong bullish market.00 1828.91 871.50 1420.89 86.50 Cumulative (A – D) (9) 39.67 The ratio indicates that the price should rise by about 7.06 -12. In short period A–D line initially it was increased and later decreased.09 1432.25 70.00 -1254.e.27 -3500.17 (i. 1260 1257 1249 1258 1258 1248 1254 1250 1248 1250 1251 1255 623 573 852 392 505 246 360 453 853 193 563 605 597 639 369 831 702 981 861 745 358 1032 645 602 26 -66 483 -439 -197 -735 -501 -292 495 -839 -82 3 882 816 1299 860 663 -72 -573 -865 -370 -1209 -1291 -1288 Long.46 -77.66 -14. 29.60 -24. In case of long A–D line it rises initially and later on decreased.16 -38.5 × 30 = 31.50 65.30 1260. while negative figure indicates a bearish market.22.58 -57.00 1309.24 8.00 2266.25 Days 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 (5) − (6) (8) 39.54 1337.57 2854. The positive value in both the lines indicates that the market was bullish in the initial period for the first 8 days of trading and later became weak which reflected on the decline of the values.86 2374.29.57 4128.17 (5)-(6) (7) 1591.17 1492.93 -13.67 1557.18 2171.47 4671.18 4000.69 967.96 -23.33 3042.00 -146.58 -98.89 46.4 5 6 7 8 9 10 11 12 13 14 15 b.18 -561.43 -587.65 -59.00 1317. Both the lines are used for analysis of the extent of a trend.84 -3356.53 -35.86 1120. Bond price − Conversion value Conversion value 890 − 22.43 1090.81 2.period A-D line: Issues traded (1) 1255 1245 1253 1260 1257 1249 1258 1258 1248 1254 1250 1248 1250 1251 1255 Advances (2) 881 840 544 623 573 852 392 505 246 360 453 853 193 563 605 Declines (3) 340 384 685 597 639 369 831 702 981 861 745 358 1032 645 602 Unchanged (4) 34 21 24 40 45 28 35 51 21 33 52 37 25 43 48 (2)/(4) x 100 (5) 2591. a.32 -109.67 – 22.42 -19.20 99.49 62.15 2305.70 36.29 1376.42 (3)/(4) x 100 (6) 1000.87% of Rs.85% b.70 6.00 -190.51 -112.00 1500.73 64.5 so that parity is reached.20 1171.29 -386.31 58.50 1273.82 c.00 990.5 × 30 5.50 -53.41 772.00 1254.11 41.38% c. . Conversion parity price of share = Bond price Number of shares on conversion per bond 890 = 30 = Rs.67 1725. Premium over investment value = Bond price − Investment value Investment value 890 − 785 = 785 = 13.
Conversion premium 890 − 22. iii. iv. so that the investors are required to retain only the equity warrant and are not required to retain the NCD. Financial institutions/bankers extend term loan facilities in the form of rupee currency and foreign currency loan. Listed securities are well preferred by bankers for extending loan facility. They give a reasonable flexibility to the company to plan its cash inflows for exercise of warrant options depending on its requirements Warrants reduce the overall cost of a debt issue as the investor may accept a lower yield in anticipation of a profit on the exercise of the warrant option. but the upside potential of capital appreciation in the event of favorable price movements is large. in practice. The investors limits his downside risk to the amount paid for the warrants. NCDs with warrant option may also be offered to the investors with offer for buy-back. Break even period = Section C: Applied Theory 6. Warrants are listed and are traded independently on the stock exchanges. Since securities are quoted. ii. Since the securities are officially traded. iii. To the Investors i.55 × 30 = 7. Advantages to the Investors • • The warrant acts as a sweetner and ensures a better subscription to the NCDs especially for companies’ with good track record. Rights entitlement in respect of further issues can be disposed of in the market. However. Warrant confers a high degree of leverage to the investor. It helps the company to mobilize resources from the shareholders through ‘Rights Issue’ for programs of expansion and modernization without depending on the financial institutions in line with the government policies. v. b. Warrants provide a mechanism for raising additional capital depending on the cash flow requirements of the company.5 × 30 Interest income − Dividends = 105 − 2. • • • • • 7. NCD with warrant is preferred be many investors because they can expect steady rate of return and capital appreciation on the NCD and can also obtain capital appreciation by subscribing to the equity shares on exercise of the warrant option. iv. To the Company The company gains national and international importance by its share value quoted on i.. subscribe to equity shares by surrendering the warrant and paying the exercise price or allowing the warrant to lapse. there is no secrecy of the price realization of securities sold . It ensures wide distribution of shareholding thus avoiding fears of easy takeover of the organization by others. Advantages to the Companies • • Growth oriented companies with a good track record will be in a position to issue a NonConvertible Debenture (NCD) with an attractive equity warrant direct to the public and reduce their dependence on the financial institutions and mutual funds. Warrants are highly geared instruments with tremendous potential for capital appreciation and are attractive speculative tools for investors. The investor has the option to sell the option in the market. The investor has the option to dispose off the warrants before the right to allotment of equity shares becomes exercisable. etc. Official quotations of the securities on the stock exchanges corroborate the valuation taken by the investors for purposes of tax assessments under Income Tax Act.d.54 years. liquidity of investment by the investors is well ensured. Advantages of Listing Listing of securities on the stock exchanges is advantageous to the company as well as to the investors as seen hereunder: a. ii. Wealth Tax Act. warrants have very limited liquidity in India. the stock exchanges.
Amalgamated companies. should follow procedures applicable to initial listing.e. Types of Listing Listing of securities is of five types as follows: Initial Listing A company. Mergers. Under the listing agreement. such companies have to list shares and/or debentures allotted by way of rights to the shareholders with stock exchange(s). whose securities have not been listed earlier in a recognized stock exchange. etc. The rules of the stock exchange protect the interest of the investors in respect of their holdings. which issue shares to the shareholders have to get the shares listed on the stock exchanges to enable the erstwhile shareholders with such shares. In such cases the company under the Listing Agreement has to submit necessary application to the stock exchange(s) for listing of its securities. Listing of Rights Issue of Shares and/or Debentures Companies whose securities are already listed may issue shares and/or debentures by way of ‘rights’ to the existing shareholders. it has to comply with the formalities applicable to initial listing. pursuant to the listing agreement should enlist with the stock exchange(s). Listing of Public Issue of Shares and/or Debentures A company whose shares are listed on a recognized stock exchange may issue shares and/or debentures to the public for subscription. Takeover offers concerning listed companies are to be announced to the public. i. Listing of Shares Issued on Amalgamation. Listing of Bonus Issue of Shares Companies which issue bonus shares by capitalization of its reserves. if desirous of listing its securities. The said details enable the investing public to appreciate the financial results of the company in between the financial year. viii. a company shortly after incorporation may issue its shares and/or debentures to the public for subscription..by the investors. vi. . Bonus shares should issue by submitting necessary application form for official quotation of the bonus shares. Listed companies are obligated to furnish unaudited financial results on a half-yearly basis within two months of the expiry of the period. It may so happen that a green field company. This will enable the investing public to exercise its discretion on such matters. In that event. vii.