Assignment Assessment Report

Campus: Level: Module Name: Students Name: e-mail id & Mob No Stream MUMBAI PCLII FIN ERST Year/semester Assignment Type Assessors Name Reqd Submission Date Actual Submission Date Submitted to : 2011 ASSIGNMENT A AMIT ASWANI 11.02.2011 REENA RAGHAVAN

BUSINESS

Certificate by the Student: Plagiarism is a serious College offence. I certify that this is my own work. I have referenced all relevant materials. (Students Name/Signatures) Expected Outcomes Assessment Criteria Grade based on D,M,P,R system Feedback

General Parameters
Clarity Analytical ThinkingResearch DoneFormatting & PresentationClear understanding of the concept Ability to analyze the problem realistically Research carried out to solve the problem Concise& clear thinking along with presentation

Subject Specific Parameters

1. 2. 3. Grades P M D Grade Descriptors A Pass grade is achieved by meeting all the requirements defined. Identify & apply strategies/techniques to find appropriate solutions Demonstrate convergent, lateral and creative thinking. Achieved Yes/No (Y / N)

Assignment Grading Summary (To be filled by the Assessor)

OVERALL ASSESSMENT GRADE: TUTORS COMMENTS ON ASSIGNMENT: SUGGESTED MAKE UP PLAN (applicable in case the student is asked to re-do the assignment) REVISED ASSESSMENT GRADE TUTORS COMMENT ON REVISED WORK (IF ANY) Date: Assessors Name / Signatures:

(i) CAPM formula = E(R s) = R f + b [E (R m) Rf]. Where, E(R s) = Expected rate of return of the security (OR) the cost of equity Rf = risk free returns E(R m) = market rate of return b = Beta co-efficient given 1.4 Substituting the values E(R s) = 10 + 1.4 (15% 10%) E(R s) =17% Applying Dividend Growth Model 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 + 0.08 0.09 =4 (1.08) / P0 P0 = 4 (1.08) = 0.09 = Rs. 48 Question 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

D1 / P0 + g,

Question 1(b) Securities Return (%) A 8 B 8 C 12 D 4 E 9 F 8

Risk (%) 4 5 12 4 5 6

Risk : Return 0.67:0.34 0.61:0.38 0.50:0.50 0.50:0.50 0.64:0.35 0.57:0.42

Preference I III VI V II 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% in security C then: The risk involved in the said portfolio will be: 2 = = (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%

Question 1(c) E(R)=Rf + (Rm-Rf) Original: Po = 12% + 1.4(6) = 12+ 8.4 = 20.4% Revised: P1= 10%+1.25(4) =15% Dividend Per Share expected a year hence is given by Dividend given +{(Dividend given/Market price)*(1+growth) After putting values in formula, 2 + (2 /Rs 25 ) x (1.05) = 2.1 Rs Po = 2.1(1.05) _______________ = 2.205 / 0.15 = Rs.14.7 0.20 0.05 P1 = 2.1(1.09) _____________ = 2.289/0.06 = Rs 38.15 0.15 0.09 Q2.The Elu Co. is contemplating a debenture issue on the following terms: Face value: Rs. 100 per debenture Term of maturity : 8 years Coupon rate of interest: Years1-2 : 8 % p.a. 3-4 : 11% p.a. 5-7 : 14% p.a. The current market rate of interest on similar debentures is 12% per annum. The company proposed to price the issue so as to yield a (compounded) good return 16% per annum to the investor. Determine the issue price. Assume redemption at a premium of 5% on face value. Note: Present value interest factor @ 16% on face value. Period Factor 0 1.000 1 0.862 2 0.743 3 0.641 4 0.552 5 0.476 6 0.410 7 0.354

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 through investment projects that otherwise wouldnt 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 the companies:

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 wouldnt be possible to develop for lack of financing. Also, this funding signifies a less cost than 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 companys free publicity, which in other way would suppose considerable expenses. The institution is objecting of attention of the media

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

Processes involved in listing of a stock in stock 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 financial institutions/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 accordance with 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 to and submitted by the companies. These guidelines will help companies to expedite the fulfillment of the various formalities and disclosure requirements that are required at various stages of

Public Issues o Initial Public Offering o Further Public Offering Preferential Issues Indian Depository Receipts Amalgamation Qualified Institutions Placements

A company intending to have its securities listed on BSE has to comply with the listing requirements prescribed by it. Some of the requirements are as under : I Minimum Listing Requirements for New Companies Minimum Listing Requirements for Companies already Listed on other II Stock Exchanges Minimum Requirements for Companies Delisted by BSE seeking relisting III on 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

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 August 1, 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 and small cap companies. A large cap company is a company with a minimum issue size of Rs. 10 crore and market capitalization of not less than Rs. 25 crore. A small cap company is a company other than a large cap company. a. In respect of Large Cap Companies i. ii. iii. The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crore; and The minimum issue size shall be Rs. 10 crore; and The minimum market capitalization of the Company shall be Rs. 25 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price).

b. In respect of Small Cap Companies i. ii. iii. The minimum post-issue paid-up capital of the Company shall be Rs. 3 crore; and The minimum issue size shall be Rs. 3 crore; and The minimum market capitalization of the Company shall be Rs. 5 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price); and The minimum income/turnover of the Company shall be Rs. 3 crore in each of the preceding three 12months period; and The minimum number of public shareholders after the issue shall be 1000. A due diligence study may be conducted by an independent team of Chartered Accountants or Merchant Bankers appointed by BSE, the cost of which will be borne by the company. The requirement of a due diligence study may be waived if a financial institution or a scheduled commercial bank has appraised the project in the preceding 12 months.

iv. v. vi.

2. For all companies : a. In respect of the requirement of paid-up capital and market capitalization, the issuers shall be required to include in the disclaimer clause forming a part of the offer document that 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 the issuer would not be listed on BSE. b. The applicant, promoters and/or group companies, shall not be in default in compliance of the listing agreement. c. The above eligibility criteria would be in addition to the conditions prescribed under SEBI (Disclosure and Investor Protection) Guidelines, 2000. [II] Minimum Listing Requirements for Companies already Listed on Other Stock Exchanges The listing norms for companies already listed on other stock exchanges 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 equity capital 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-recurring nature shall be excluded while calculating the profit making track record. 3. Minimum net worth shall be Rs. 20 crore (net worth includes equity capital and free reserves excluding revaluation reserves). 4. Minimum market capitalisation of the listed capital shall be at least two times of the paid up capital. 5. The company shall have a dividend paying track record for at least the last 3 consecutive years and the dividend should be at least 10% in each year. 6. Minimum 25% of the company's issued capital shall be with NonPromoter shareholders as per Clause 35 of the Listing Agreement. Out of above Non-Promoter holding, no single shareholder 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 Institutional Investors/Overseas Corporate Bodies and Non-Resident Indians. 7. The company shall have at least two years listing record with any of the Regional Stock Exchanges.

8. The company shall sign an agreement with CDSL and NSDL for demat trading. [III] Minimum Requirements for Companies Delisted by BSE seeking Relisting on BSETop Companies delisted by BSE and seeking relisting at BSE are required to make a fresh public offer and comply with the extant guidelines of SEBI and BSE regarding initial public offerings. [IV] Permission to Use the Name of BSE in an Issuer Company's Prospectus Companies desiring to list their securities offered through a public issue are required to obtain prior permission of BSE to use the name of BSE in their prospectus or offer for sale documents before filing the same with the concerned office of the Registrar of Companies. BSE has a Listing Committee , comprising of market experts, which decides upon the matter of granting permission to companies to use the name of BSE in their prospectus/offer documents. This Committee evaluates the promoters, company, project , financials, risk factors and several other aspects before taking a decision in this regard. Decision with regard to some types/sizes of companies has been delegated to the Internal Committee of BSE. [V] Submission of Letter of Application As per Section 73 of the Companies Act, 1956, a company seeking listing of its securities on BSE is required to submit a Letter of Application to all the stock exchanges where it proposes to have its securities 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 the allotment of securities offered to the public within 30 days of the date of closure of the subscription list and approach the Designated Stock Exchange for approval of the basis of allotment. In case of Book Building issues, allotment shall be made not later than 15 days from the closure of the issue, failing which interest at the rate of 15% shall be paid to the investors. [VII] Trading PermissionTop As per SEBI Guidelines, an issuer company should complete the formalities for trading at all the stock exchanges where the securities

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 in SEBI (Disclosure and Investor Protection) Guidelines 2000 for allotment of all securities and dispatch of allotment letters/share certificates/credit in depository accounts and refund orders and for obtaining the listing permissions of all the exchanges whose names are stated in its prospectus or offer document. In the event of listing permission to a company being denied by any stock exchange where it had applied for listing of its securities, the company cannot proceed with the allotment of shares. However, the company may file an appeal before 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 the company not resolving the complaints of investors regarding delay in sending refund orders/share certificates, non-payment of commission to underwriters, brokers, etc. [IX] Payment of Listing Fees All companies listed on BSE are required to pay to BSE the Annual Listing 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 several different things in the financial world. They are most commonly used to describe the implicit and explicit valuation of publicly-traded companies, but can also be used to describe the valuation of stock options. Stock Market Value refers to the value of stocks traded in a particular market. In specific cases the market capitalization and the market value of debt attributed to a particular stock is its Total Market Value. Generally the value of a particular stock is measured at different levels by different methods of analysis, but it is important to note that there are two basic parameters to check the value of stocks. They are: Book Value

The term used in the UK for Book Value is Net Asset Value which almost completely explains the meaning of term in brief. Book Value is derived from the balance sheet of a company, where its overall worth is reflected. In other words it is also the fundamental worth of the company - the term company fundamentals is widely used in the stock market. According to Investopedia, In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment. Market Value Like with stocks, the market value of an option is simply the price anybody is willing to pay for it in the open market. This price is influenced by four core variables: the strike price of the option, how much time it has left until expiration, whether or not it has any intrinsic value and the volatility of the underlying stock. The market value of a stock is determined on the basis of the investors impression of the potential of a companys stock to perform well in the medium to long term. It is widely used across different industrial and commercial segments to explain the long-term potential value of a particular commodity. The term has particularly widespread use in the real estate industry. Market value takes into account the image formed by the company in its target market. This may sometimes result in the overpricing of certain stocks but overall it gives a fair idea about the value of the stock The market value of a security is what anyone is willing to pay for it in the open market. Depending on broader market conditions and the popular opinion of investors at any given time, a company's market value can either be much higher or lower than its fundamental and intrinsic value.

Intrinsic Value Intrinsic value is a somewhat more nebulous, subjective term than market value. It typically refers to the value of a company's intellectual property like copyrights, trademarks and patents or other intangible things like business models, personal contacts and complex

proprietary technology that may be difficult to properly value in the open market This is another example of an analysis that includes all aspects of a companys business, both in term of its tangible and intangible assets. It is called Intrinsic value because it goes beyond the book value in quantifying the tangible assets and beyond the market value in quantifying intangible assets. Investors seeking intrinsic value in a stock expect the value of their investments to exceed the existing market value of the stock. The stock market has different analytical methods to value stocks and other 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 debt instruments. Investment Considerations Prominent investors like Benjamin Graham and Warren Buffett made some of their greatest profits by purchasing fundamentally-sound, well-run companies when their market value was running at a substantial discount to their intrinsic value. They were able to look past the near-term problems and bad news affecting the firms and realize that once ephemeral issues were taken care of, they would be viable, profitable enterprises.