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

· Growth rate in earnings will decline from 22% in year five to 8% in year 10 in linear increments.

· Payout ratio will increase from 25% to 60% over the identical period in linear increments.

· Beta will drop from 1.20 to 1.00 over the identical period in linear increments.

· Risk free rate is 4.5%.

· Market rate of return is 10%.

You are needed to

a. Estimate the share price of HIL as on March 31, 2006.

b. Estimate the share price of HIL using 3 Stage Dividend Discount Model, if under the transition period only growth rate modifications other things remaining identical as high growth period.

(6 + five = 11 marks) < ans >

3. Lead bank Ltd. (LBL) issued a Deep Discount Bond. The bond has a face value of Rs.80,000 and it is offered at a deep discounted price of Rs.2,700 with a maturity of 25 years. The investor has been provided choice (put option) to seek redemption at the end of every five-year. The redemption prices are as follows:

End of year
5
10
15
20
25

Price (Rs.)
5,000
10,000
20,000
40,000
80,000


LBL has an choice (call option) to redeem at the end of every 5 years given LBL notifies the bondholders of its intentions atleast six months in advance. The indexed cost of acquisition is 6%. You can presume tax rate of 30%.

You are needed to

a. Determine the post-tax yield curve of the Deep Discount Bond.

b. Comment on the % change in the yield for different maturities of the Deep Discount Bond.

c. Comment on what will be the maturity of bond, if the yield curve modifications immediately after the problem and remains at the identical level thereafter.

(5 + one + two = eight marks) < ans >

4. subsequent are the various limit orders for buy and sell for Hindustan Lever Ltd. as on December 9, 2005 before 9:55 A.M.:

No.
volume
Price (in Rs.)


1
4570
187.75
Buy

2
1760
187.80
Buy

3
250
187.60
Buy

4
26009
187.55
Buy

5
12
187.70
Buy

6
1
188.05
Sell

7
1
188.15
Sell

8
541
188.10
Sell

9
6824
188.00
Sell

10
1011
188.20

Earning:   Approval pending.