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

House No. 4
28,000
4,20,000
6.67%


Now, 5.14 + 5.48 + 6.08 + 6.67/4 = 5.84%

Therefore, choice (a) is the accurate ans.
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30.
Answer: (e)

Reason: The reasons for the current market price being less than the NAV can be as follows:

I. Investors’ doubt about the abilities of the fund’s management.

II. Lack of sales effort.

III. Riskiness of the fund.

IV. Lack of marketability of the fund’s units.

Therefore, choice (e) is the accurate ans.
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part B : issues

1. a. Value of per unit for Mehta Investment Trust (MIT) as per the dividend discount model:



b. The book value and residual incomes for the next 4 years are:

Year
1
2
3
4

Beginning book value
100.00
110.00
125.00
150.00

Retained earnings (Net income – Dividends)
10.00
15.00
25.00
(150.00)

Ending book value
110.00
125.00
150.00
0.00

Net income
20.00
35.00
50.00
62.50

Less equity charge (r book value)
10.00
11.00
12.50
15.00

Residual income
10.00
24.00
37.50
47.50

current value @ 10%
9.09
19.83
28.17
32.44


Therefore Value per unit as per residual income

= 100 + 9.09 + 19.83 + 28.17 + 32.44 = 189.53.

c.

Year
1
2
3
4

Net income
20.00
35.00
50.00
62.50

Beginning book value
100.00
110.00
125.00
150.00

Return on equity
20.00%
31.82%
40.00%
41.67%

ROE – r
10.00%
21.82%
30.00%
31.67%

Residual income = (ROE – r) Book value
10.00
24.00
37.50
47.50

current value @ 10%
9.09
19.83
28.17
32.44


Therefore Value per unit as per residual income

= 100 + 9.09 + 19.83 + 28.17 + 32.44 = 189.53.

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2. a.

Reinvestment rate
1
2
3
4
5

7%
90FVIFA­(7%, 1) – (90 1)
90FVIFA­(7%, 2) – (90 2)
90FVIFA­(7%,3) – (90 3)

Earning:   Approval pending.