M.B.A Business Administration Security Analysis I - Question paper
Security Analysis I (MB331INV): April 2008
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 statement(s) is/are true? I. A unique characteristic line is plotted for each security to determine the beta. II. For a characteristic line, the X-axis represents betas for different securities. III. The slope of the characteristic line is the difference between the market returns and risk-free returns. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) Both (II) and (III) above.
2. According to the Capital Asset Pricing Model (CAPM), the expected return of a well diversified portfolio with a beta of 1.0 and positive ex-ante alpha (a) is (a) The risk-free rate, r f (b) ß (r œ r ) m f (c) Between r and r m f (d) The expected return on the market, r m (e) r + a. m
3. Which of the following departments of SEBI is responsible for stockbrokers, sub-brokers, delisting of securities, demutualization and corporatization of the stock markets? (a) Primary market department (b) Secondary market department (c) Collective investment schemes department (d) Venture capital department (e) Investigation, enforcement and surveillance department.
4. Which of the following statements is/are true regarding fundamental analysis? I. Market price and intrinsic value can differ from time to time, but eventually investors will recognize the discrepancy and act to bring the two values together. II. Single estimate of intrinsic value of a stock is forecasted by the analyst. III. The intrinsic value of a stock is estimated by discounting the shareholder's prospective dividend stream. (a) Only (I) above (b) Only (II) above (c) Both (I) and (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.
5. Which of the following is/are true if a firm has a required rate of return equal to the ROE? I. The amount of earnings retained by the firm does not affect market price or the P/E. II. The firm can increase market price and P/E by increasing the growth rate. III. The P/E ratio is inversely proportional to the ROE of the firm. (a) Only (I) above (b) Both (I) and (II) above (c) Both (I) and (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.
6. In which of the following situations the company profits is/are inflated? 1
I. Switching from straight line method of depreciation to written down value method during later years of the life of the asset. II. Writing off miscellaneous expenses over a period of time instead of capitalizing the expenses. III. Switching from LIFO to FIFO method of inventory valuation during decreasing prices. (a) Only (I) above (b) Only (III) above (c) Both (I) and (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.
7. According to the Efficient Market Hypothesis (EMH) I. Stocks with smaller beta will be consistently overpriced. II. Stocks with higher beta will be consistently underpriced. III. Positive alphas on stocks will not remain for a longer period. (a) Only (I) above (b) Only (III) above (c) Both (I) and (II) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.
8. Which of the following is false regarding the advantages of OTCEI to the investors? (a) Investors will display security prices online and hence price blindness is removed (b) It removes liquidity by introducing new players' namely compulsory market makers to help the small investors for sale of their securities (c) It helps to reduce the delay in settlements (d) It intends to provide the information relating to the companies to all its investors (e) Investors need not go to the distant stock exchange but can trade through the counters of OTCEI setup at several centers.
9. The cash earning per share for Koushik Ceramics Ltd. is Rs.12. The net sales and the depreciation are Rs.1,000 crores and Rs.20 crores respectively. The net profit margin for the company is 10%. The earning per share for the company is (a) Rs. 6.00 (b) Rs. 7.50 (c) Rs.10.00 (d) Rs.12.50 (e) Rs.15.00.
10. Which of the following will decrease the interest coverage ratio of a firm? (a) An increase in the interest rate paid on outstanding debt (b) A reduction in the tax rate (c) A reduction in working capital (d) Deciding to depreciate an asset over 15 years instead of 10 years (e) A reduction in share capital of the firm.
11. Anuradha Industries Ltd. has a stable growth of 4%. It pays out 50% of its earnings as dividends. The ROE for the company in the beginning of the year was 12%. The required rate of return is 11%. The price to book value ratio (P/BV) for the firm is (a) 0.32 (b) 0.42 (c) 0.89 (d) 3.43 (e) 3.57.
12. Which of the following securities is most liquid? (a) Money market instruments (b) Capital market instruments (c) Gilt-edged securities (d) Index Futures (e) Stock options.
13. Mr. Sushil kumar has formed a portfolio and the characteristics of his portfolio are given below: 2
Security Solar Ltd. Polar Ltd. Treasury Bill Index Fund Weight 0.07 0.25 0.25 0.43 ß 1.72 0.89 ? ? Beta of his portfolio is (a) 0.8229 (b) 1.0229 (c) 0.5529 (d) 0.4629 (e) 0.7729.
14. By which of the following modes of raising capital the company raises additional finance from existing members by offering securities on pre-emptive basis? (a) Public issue (b) Rights issue (c) Bonus issue (d) Private placement (e) Bought-out-deals.
15. Accounting Standards-10 (AS-10) refers to (a) Disclosure of accounting policies (b) Accounting for construction contracts (c) Accounting for research and development (d) Revenue recognition (e) Accounting for fixed assets.
16. The leverage ratio used in ROE analysis is (a) Sales ratio (b) Profit margin (c) Total assets to net worth (d) Tangible net worth to total assets (e) Long-term debt to equity ratio.
17. Which of the following statements is false about the Security Market Lines (SML)? (a) SML represents normal trade-off between return and risk (b) The vertical distance of the security's plot on the graph from the SML is called the security's alpha (c) SML is same as the characteristic line for any security (d) Ex-post SMLs are used to evaluate the performance of portfolio managers (e) The slope of the characteristic line is the beta for the particular security involved.
18. Which of the following statements is false with respect to different features of an efficient market? (a) Information arbitrage efficiency is said to exist, if the participants do not have any scope to reap abnormal profits using information that is of common knowledge (b) Fundamental valuation efficiency is said to exist, if the price of an asset is neither undervalued nor overvalued (c) Full insurance efficiency is said to exist, if participants can adopt hedging as an effective tool against possible risk in future (d) Operational efficiency is said to exist, if the operating costs are minimum possible to participants, but still provides a fair return to the intermediaries for their services (e) Allocation efficiency is said to exist, if the market channelizes resources into projects where the marginal efficiency of capital adjusted for risk differences is lowest.
19. Which of the following statement(s) is/are true of the constant growth Dividend Discount Model (DDM)? I. It assumes that each future dividend is (1 + g) times greater than the prior dividend. II. Assumes that the discount rate is greater than the growth rate. III. Assumes that the increase in growth rate is constant over time. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) Both (I) and (III) above. 3
20. Which of the following is/are main objective(s) of International Organization of Securities Commissions (IOSCO)? I. To exchange information on their respective experiences in order to promote the development of domestic markets. II. To cooperate and promote high standards of regulation in order to maintain just, efficient and sound markets. III. To unite their efforts to establish standards and effective surveillance of international securities transaction. (a) Only (II) above (b) Both (I) and (II) above (c) Both (I) and (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.
21. Which of the following is not true about the depository system? (a) Filling up transfer deeds and lodging the same with the company for transfer is necessary (b) There would not be any bad deliveries (c) Exemption from paying stamp duty on transfer of shares (d) Shares purchased in electronic form will be transferred to the investor's name within a day of completion of settlement (e) No scope for forgery of share certificates.
22. If 91 œ day treasury bills with a face value of Rs.100 each have been aligned with the term structure of interest rate and are available at a discount of 3.5% p.a., then the treasury bills are presently selling at (a) Rs.99.78 (b) Rs.99.13 (c) Rs.95.23 (d) Rs.91.23 (e) Rs.87.26.
23. Under CRISIL 500 equity index, which of the following is not the parameter for selection of the company? (a) Market capitalization of the company (b) Industry representation (c) Trading interests in the scrips (d) Stock exchanges covered (e) Fundamentals of the company.
24. The beta of stock XYZ is 0.64. If the ratio of standard deviation of market returns to standard deviation of stock returns is 0.75, the correlation coefficient of return on stock XYZ with market return is (a) 0.23 (b) 0.31 (c) 0.36 (d) 0.48 (e) 0.85.
25. 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.
26. Required rate of return on a stock is 15% and it has paid a dividend of Rs.2.75 for the year 2007-2008. If the stock is currently available at a price of Rs.52, the implied growth rate in dividends is (a) 6.35% (b) 7.85% (c) 9.22% (d) 9.72% (e) 10.05%.
27. Ceramic Pharma Ltd. has paid a dividend of Rs.3.50 per share on a face value of Rs.10 in the financial year ended 31 March, 2008. The relevant data regarding the company and the market are as under: s t 4
Current market price of share = Rs.75 Growth rate of earnings and dividends = 7.5% Beta of share = 0.95 Average market return = 12.5% Risk free rate = 6% The intrinsic value of the stock is (a) Rs. 60.00 (b) Rs. 80.48 (c) Rs. 89.00 (d) Rs. 94.26 (e) Rs.104.25.
28. A company has an ROE of 0.25 and book value of Rs.15.63, the EPS for this company is (a) 3.11 (b) 3.41 (c) 3.91 (d) 4.51 (e) 5.61.
29. Which of the following is not a leading economic indicator? (a) Utilization of manufacturing capacity (b) Change in general level of stock prices (c) Residential construction (d) Corporate profits (e) Average duration of unemployment.
30. Which of the following is/are true about advantages of Economic Value Added (EVA)? I. It is primarily used for evaluating the performance of management. II. It serves as a proxy for measuring a firm's stock performance. III. It can be applied to capital budgeting like NPV. (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.