Introduction to Security Analysis - Exam Paper: - MBA, ICFAI Accounting.

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Answers provided at the end Question paper Introduction to Security Analysis (MB3G1F) : Section A : Basic Concepts (30 Marks) 1. Which of the following purpose is not served by an index? (a ... ) It is helpful in evaluating the portfolio risk-return analysis (b) It serves as a barometer of the changes in trading patterns in the stock market (c) The growth in the primary market can be measured through the movement of indices (d) It is useful indicator of a country’s economic health (e) Indices can be calculated industry-wise to know their trend pattern and also for comparative purposes across the industries and with the market indices. 2. Which of the following statements are true with respect to Beta? I. Beta is the slope of the Security Market Line. II. Beta measures the non-diversifiable risk. III. Beta indicates the manner in which a security’s return changes systematically with changes in the market’s return. IV. Beta greater than one is referred to as an aggressive security. (a) Both (I) and (III) above (b) Both (II) and (III) above (c) (I), (III) and (IV) above (d) (II), (III) and (IV) above (e) All (I), (II), (III) and (IV) above. 3. In a portfolio consisting of two securities in which funds have been invested in equal proportions, one of the securities is risk-free security and the other one is risky security. The standard deviation of the portfolio will be equal to (a) The standard deviation of the risky security (b) Half of the standard deviation of the risky security (c) One-fourth of the standard deviation of the risky security (d) Twice the standard deviation of the risky security (e) Zero. 4. Consider the following data about two securities A and B: Variance of returns on the market index is 400 (%)2 . The correlation coefficient between the returns on securities A and B is 0.94. The systematic risk of a portfolio consisting of these two securities in equal proportions is (a) 24.63(%)2 (b) 460.00(%)2 (c) 529.00(%)2 (d) 606.73(%)2 (e) 802.40(%)2. <Answer> 5. Anirudh Ltd., issues right shares which increases the market value of the shares of the company by Rs.150 crore. The aggregate market value of all the shares included in the index before the right issue made is Rs.2,500 crore. If, the Base year average for calculating the index number for a period starting from the time the right issue is made till the next base year change becomes necessary is Rs.1,010 crore, what is the existing base year average? (a) Rs.1,070.60 crore (b) Rs.1,005.94 crore (c) Rs. 952.83 crore (d) Rs. 949.40 crore (e) Rs. 823.23 crore. 6. Which of the following is true, if entry barriers are low and exit barriers are high in the industry? (a) Returns are low and stable (b) Returns are high and stable (c) Returns are low and risky (d) Returns are high and risky (e) Returns may vary depending on industry selected. 7. Change in which of the following accounting policies will not affect the profit figures reported between two time periods? (a) Treatment of R & D expenditure (b) Treatment of gratuity liability (c) Valuation of Inventories (d) Treatment of depreciation provisions (e) Revaluation of financial investment for treasury operations. <Answer> 8. A convertible bond with a face value of Rs.1,000 had been issued at Rs.1,300 with a coupon rate of 14%. The conversion rate is 20 shares per bond. The current market price of the bond is Rs.1,650 and that of stock is Rs.66. The premium over conversion value is (a) 8.33% (b) 20.00% (c) 25.00% (d) 30.00% (e) 41.67%. 9. Which of the following statements is/are not true regarding the Price/Sales (P/S) ratio? I. P/S ratio is useful for valuing companies even with no dividends at all. II. P/S ratio can be positive or negative. III. Firms with low profit margins and high P/S ratio are undervalued. IV. P/S ratio is not influenced by accounting methods. (a) Only (I) above (b) Only (II) above (c) Both (I) and (III) above (d) Both (II) and (III) above (e) (II), (III) and (IV) above. 10. Which of the following statements is false with respect to the two-stage dividend discount model? (a) It is difficult to specify the supernormal growth period with precision (b) The model suffers with the limitation of the change of high supernormal growth to a lower stable growth rate at the end of the supernormal growth period (c) The terminal price calculated in this model is derived from Gordon model (d) This model is best suited to those firms which have a high growth rate in the beginning and a gradual decline in the growth rate over a period of time (e) This model assumes high-growth period and stable-growth period for valuing a stock. 11. The current share price of Excel Ltd., is Rs.78 per share and the dividend is expected to be Rs.5.80. The duration of this stock will be (a) 11.50 years (b) 12.22 years (c) 13.45 years (d) 20.55 years (e) 22.22 years. 12. Which of the following statements is a property of realized yield? (a) For bonds with longer term to maturity, realized yield will be higher than the reinvestment rate (b) If the reinvestment rate is greater than realized yield, the realized yield will be lesser than YTM (c) Even if the coupons are reinvested at a rate different from the YTM, the realized yield will be equal to promised YTM (d) If the reinvestment rate is greater than realized yield, the realized yield will be equal to YTM (e) For bonds with shorter term to maturity, realized yield will be closer to the YTM. <Answer> 13. IDBI came out with an issue of deep discount bonds. Each bond having a face value of Rs.1,25,000 was issued at a deep discounted price of Rs.480.50 with a maturity period of 15 years. The corporate tax rate applicable is 25%. If the indexed cost of acquisition is 25%, then the post-tax yield to maturity of the bond is (a) 42.47% (b) 35.21% (c) 29.67% (d) 11.58% (e) 5.37%. 14. Which of the following would be true evidence against the semi-strong form of market efficient theory? (a) No investor can make superior profits by purchasing or selling stock after the announcement of unexpected rise in dividend (b) Trend analysis is worthless in determining stock prices (c) Positive abnormal returns can be expected from low P/E stocks (d) Mutual fund managers do not persistently make superior returns (e) Investors cannot make superior profits by changing his portfolio according to change in the interest rates. <Answer> <Answer> 15. An index model regression applied to past monthly returns in ACC stock price produces the following estimates, which are believed to be stable over time: rACC = 0.15% + 1.2 rM If the return on market index subsequently rises by 8% and return on ACC’s stock rises by 7%, the abnormal return earned on ACC’s stock will be (a) –2.75% (b) –1.65% (c) 0.55% (d) 1.65% (e) 2.75%. 16. Which of the following techniques is used to identify the trend reversal before it takes place? (a) Volume of the market (b) Momentum (c) Simple moving average (d) Breadth of the market (e) Weighted moving average. 17. Which of the following statements are not true with respect to Triangles of Technical Analysis? I. In Symmetrical Triangle, volumes increase as the triangle narrows towards the apex. II. A Symmetrical Triangle cannot be said to be in a continuation pattern or a reversal pattern before the breakout. III. With Right angled Triangle, the resistance or support level cannot be determined. IV. In Right angled Triangle, the direction of breakout can be identified before the actual breakout. (a) Both (I) and (III) above (b) Both (II) and (IV) above (c) Both (III) and (IV) above (d) (I), (II) and (III) above (e) All (I), (II), (III) and (IV) above. 18. Which of the following statements is/are true in relation to futures contract? I. The difference between the two prices of the futures contract is called as spread. II. The inter commodity futures spreads require lower margin than single futures contract. III. Basis is equal to futures price minus current cash price. IV. Basis is higher for futures contracts with longer maturity. (a) Only (I) above (b) Both (I) and (II) above (c) Both (III) and (IV) above (d) (I), (II) and (IV) above (e) (I), (III) and (IV) above. <Answer> 19. Margin in a futures contract depends on the price volatility of the underlying asset. The margin requirement can be estimated by calculating: I. Average daily absolute change in the value of futures contract. II. Average number of transactions of the futures contract. III. Standard deviation of the absolute change in the value of futures contract. IV. Coefficient of variation of the absolute change in the value of futures contract. (a) Both (I) and (II) above (b) Both (I) and (III) above (c) Both (III) and (IV) above (d) (I), (III) and (IV) above (e) (II), (III) and (IV) above. <Answer> 20. The shares of Supreme Industries Ltd., are trading at Rs.370. Put options with a strike price of Rs.380 are priced at Rs.16. The intrinsic value and time value of the options respectively are (a) Rs. 6, Rs.10 (b) Rs. 8, Rs. 8 (c) Rs. 8, Rs.16 (d) Rs.10, Rs. 6 (e) Rs.16, Rs.12. 21. Which of the following options is/are not in-the-money? <Answer> Type of option Strike Price (Rs.) Market Price (Rs.) A Call 185 179 B Call 210 225 C Call 315 315 D Put 98 110 E Put 162 148 (a) Only C above (b) Both A and E above (c) Both B and D above (d) Both B and E above (e) A, C and D above. <Answer> 22. Stock of Zenith Ltd. has conversion parity price of Rs.38.50. If the number of shares on conversion per warrant is 28, the bond price is (a) Rs.1,220.50 (b) Rs.1,165.50 (c) Rs.1,105.00 (d) Rs.1,078.00 (e) Rs. 998.00. 23. Which of the following statements is not true with respect to interest rate theories? (a) According to Liquidity Preference Theory, spenders keep a proportion of their assets as cash balances for maintaining liquidity (b) According to this Pure Expectations Theory, the current term structure of interest rates is determined by the consensus forecast of future interest rates (c) According to the Loanable Funds Theory, interest rates in different sectors in the economy can be predicted (d) According to the Liquidity Premium Theory, the investors are not indifferent to risk and they charge higher rates than the expected future rates, if the maturity of the instrument increases (e) According to the Preferred Habitat Theory, it is a pre-requisite that the liquidity premium should increase at a uniform rate with maturity. 24. Bond A has a 12% coupon and Bond B has an 8% coupon. Both bonds have a 10% YTM and five years to maturity. Which of the following statements is most correct? I. If market interest rates were to increase, Bond B would have the greatest decrease in price. II. If market interest rates remain unchanged, Bond A's price will be higher one year from now than it is today. III. If market interest rates were to decrease, Bond A would have the greatest increase in price. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (III) above (e) All (I), (II) and (III) above. 25. Which of the following principles is/are true with respect to Real Estate Appraisal? I. According to the Principle of Substitution, a rational owner will try to gain the maximum out of the resources he has. II. According to the Principle of Change, price is function of demand and supply and value of property fluctuates with price. III. According to the Principle of Marginal Productivity, the value of any factor of production or component of a property can add to or lower the value of the asset. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) Both (II) and (III) above. 26. Which of the following statements is true regarding mutual funds? (a) The shares of close-ended funds are redeemable at their NAV (b) Open-ended funds can sell unlimited number of units (c) The fund units are sold to the public at the NAV (d) Real estate fund is an open-ended fund (e) Specialized funds carry low risk. 27. Consider the following data of JM Mutual Fund (Income plan): of outstanding units will be (a) 147.45 crore (b) 157.98 crore (c) 172.02 crore (d) 221.17 crore (e) 235.22 crore. If present NAV of the mutual fund is Rs.12.37 per unit, then number 28. Which of the following statements is true with respect to the industry life cycle? (a) In the pioneering stage few companies continue to get stronger, both in share of the market and financially (b) In the stabilization stage, many firms are lured into the industry as a result of profit opportunities (c) The pioneering stage is typified by rapid growth in demand for the output of the industry (d) In the expansion stage, as a large number of firms attempt to capture their share of the market, there arises a high business mortality rate (e) The stabilization phase is typified by reduction in competition between firms. 29. Who among the following cannot become members of OTCEI? 5Public Listed Corporates (a) Scheduled Banks (b) Mutual Funds (c) Venture Capital Funds (d) Banking Subsidiaries. 30. Which of the following statements is not true with regard to Central Government Dated Securities? (a) They can be held either in the form of promissory notes or stock certificates (b) The price quotation of these securities are reported to stock exchange for inclusion in the official quotations list by the licensed dealers (c) Issue of these securities are handled by RBI (d) Payment of interest on these securities is handled by the commercial banks for a fee (e) Discount and Finance House of India offers two way quote in government securities in the secondary market. Section B : Problems/Caselet (50 Marks) 1. The dividends on the equity shares of Pioneer Industries Ltd. (PIL) have been experiencing a growth rate of 12% per annum in the recent years, which is considered to be above normal. The above normal growth rate in dividends is expected to continue for four years after which the growth rate will reduce to 5% per annum which will continue indefinitely. The company has recently announced a dividend of Rs.2.00 per share. The required rate of return on the equity shares is 15%. You are required to find out the value of the equity share of PIL. (10marks) Data for 15-trading days for Group B1 scrips of BSE is given below: You are required to calculate: a. Short-period A-D line. ( 4 marks) b. Long-period A-D line. ( 6 marks) 3. Tetra Pharmaceuticals Ltd., has recently come out with a partly convertible debentures (PCDs) to (12marks) <Answer part finance its Rs.20 crore capacity expansion programme. As per the terms of this issue, 12% PCDs of Rs.200 each will be issued at par. The convertible part of the debenture (Part A) of Rs.100 will be converted into 2 equity shares of face value Rs.10 after 18 months from the date of allotment. The non convertible part (Part B) of Rs.100 will be redeemed after 7 years. Interest will be paid semi annually. The following additional information, and projections are available about the company: March 2004 March 2005 March 2006 March 2007 EPS (Rs.) BONUS (Ratio) 3.50 3.00 1:3 3.25 3.40 Month Jan. 2008 Apr. 2008 July 2008 Sep. 2008 Dec. 2008 Average P/E Ratio 15 14.8 14.5 14.0 13.8 Mr. Rakesh, an investor requires a rate of return of 14% p.a. compounded semi-annually. You are required to advise Mr. Rakesh whether he should subscribe to the issue. Caselet Read the caselet carefully and answer the following questions: 4. A value of beta explains the risk associated with a security. With respect to this explain various types of beta values. ( 6 marks) 5. Beta is a good tool for assessing the movement of stock based on the relationship between the return on the stock and the market. But there are some problems where only beta is used for determining risk of an investment. Discuss. ( 7 marks) 6. The Beta of a security fails to correctly reflect the inherent risk during the period of economic slowdown and recession. Explain. ( 5 marks) In the recent market run, there has been a high level of price volatility. If one has to watch out for the movement of the stock of the leading scrip then the most common way to measure this is by means of ‘beta’. Beta is a measure that tells about how much a stock has moved in relation to the index for a defined period of time. Beta value can be readily available from the various websites. Ideally the stock should be such, which can always beat the index. It should rise more when the market are bullish and falls less when market is in a bearish grip. So, according to the risk taking ability of the individual, the stock should be selected. A proper strategy should be framed to invest in a portfolio based on the stock’s sensitivity to the market index. Investments that carry higher than average risks should offer the opportunity to earn much higher returns, but in reality, however, it is not very easy to strategic investments, which adhere to that principle. There are many variables that affect the stock return; moreover there is more than one way of calculating risk, thus making risk-reward assessment a complex exercise. Mostly all variables are based on past data and can provide little clue about future. An analysis of historical beta across sectors does not provide enough evidence to suggest, that high beta stocks deliver better returns in rising market, or fall more steeply in falling market. This is primarily because beta values change rapidly based on market moods. Beta values are useful for positioning a portfolio based on your risk appetite and buying a stock based on beta alone is not a good idea. Investors can find the best use of the beta ratio in short-term decision-making, where price volatility is important. If you are planning to buy and sell within a short period, beta is a good measure of risk. However, as a single predictor in long-term investment, the beta has too many flaws. Careful consideration of a company’s fundamentals will give you a much better picture of the potential long-term risk. Beta is also useful in reducing the combined systematic risk of the portfolio. If an investor has a portfolio of highly volatile stock which had beta greater than 1 during the past one year, then it make sense to reduce overall portfolio risk by adding defensive stocks having beta less than 7. To cater the need of the different categories of investors globally, various important services are offered by the Mutual Funds. Discuss them in brief. ( 10 marks) 8. Listing means admission of securities for trading on a stock exchange. It is done through a formal agreement between the stock exchange and the company. In this context, explain how listing of securities is advantageous to the company as well as to the investor. ( 10 [Show More]

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