Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis – II - Question Paper

Month Close price (Rs.)
Return on the stock (%)
Closing value of Index
Return on the market
()
()
(6) x (7)



(1)
(2)
(3) (Ri)
(4)
(5) (Rm)
(6)
(7)




September-04
73.00

1745.50







October-04
80.65
10.48
1786.90
2.37
3.47
-1.17
-4.05
12.04
1.36

November-04
88.05
9.18
1958.80
9.62
2.17
6.08
13.17
4.69
36.97

December-04
92.20
4.71
2080.50
6.21
-2.30
2.67
-6.14
5.28
7.14

January-05
101.35
9.92
2057.60
-1.10
2.91
-4.64
-13.52
8.49
21.54

February-05
115.70
14.16
2103.25
2.22
7.15
-1.32
-9.45
51.11
1.75

March-05
111.05
-4.02
2035.65
-3.21
-11.03
-6.75
74.49
121.64
45.62

April-05
116.25
4.68
1902.50
-6.54
-2.33
-10.08
23.46
5.42
101.62

May-05
128.65
10.67
2087.55
9.73
3.66
6.19
22.62
13.37
38.27

June-05
131.35
2.10
2220.60
6.37
-4.91
2.83
-13.92
24.12
8.03

July-05
145.40
10.70
2312.30
4.13
3.69
0.59
2.17
13.59
0.35

August-05
153.50
5.57
2384.65
3.13
-1.44
-0.41
0.59
2.07
0.17

September-05
162.75
6.03
2611.20
9.50
-0.98
5.96
-5.86
0.97
35.53


Total
84.17

42.43


83.56
262.78
298.35


avg.
7.01

3.54







Standard deviation of return on the stock = 4.89 (%)

Variance of the market returns = 27.12 (%)2

Beta = Covariance / Variance on the market =

Systematic risk = b2 x Variancem = (0.28)2 x 27.12
2.13 (%)2

Variance of the stock = (4.89)2
23.89 (%)2

Unsystematic risk = 23.89 – 2.13
21.76 (%)2

Unsystematic risk as a % of total risk
91.08%


As the unsystematic risk is more than 60%, the provided investor should not make the investment.

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5. Valuing a company with inconsistent schedule of earning, or worse, with no earning at all requires a delicate balancing act on part of the analysts. At these instances, traditional methods of valuations befall to helplessness. That’s where the price/sales ratio comes in. Just like its more popular option the P/E ratio, PSR (Price-to-Sales Ratio) is useful to value any company. Price-to-Sales Ratio for a company can be computed by dividing the market capitalization of a company by its total revenue for the last 4 quarters. As compared to PE ratio, Price-to-Sales Ratio is a more reliable measure because, unlike earnings, revenue for a company is difficult to manipulate. Besides earnings is a complex figure which may include inflows from non-recurring events also. Therefore, analysts look to both the PE ratio and PS ratio of companies before taking any investment decision. PS ratio is useful while valuing companies even with no earnings at all. PS ratio comes handy to value companies in today’s dynamic set-up where mergers and divestitures are a part of the daily routine. For examples, need for economy of scale has driven companies in telecom sector for sometime. Owing to write-offs related to merger, several such companies report negative earnings soon after the process. However, strategically and fundamentally, the company may well be on its way to a bright future. This can be verified by analyzing the Price-to-Sales Ratio, which may be growing immediately after the merger, thus presenting a more realistic presentation of the prospect for the company.

Earning:   Approval pending.