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

1.09462
90

90

60

60

50

40






100

100

216.73 + 200 + 293.1372
0.5950+ 90

0.6962+ 90

1.6012+ 60

1.8092+ 160

2.0084+ 150

35.6492+ 426.2744
0.8772

0.7695

0.6750

0.5921

0.5194

0.4556
0.5219 +78.948

0.5357 + 69.255

1.0808 + 40.50

1.0712 + 94.736

1.0432 + 77.91

16.2418+194.2106







20.4946+555.5596

Second choice
Year
Dividend
Interest
Stock/Redemption

value
Total

inflow
PVIF @14%
PV of

cash flow

1

2

3

4

5

6
0.5950

0.6962

0.8006

0.9046

1.0042

1.0946
90

90

90

90

80

70






100

100

116.73 + 500 + 293.1372
0.5950+90

0.6962+90

0.8006+90

0.9046+190

1.0042+180

17.8246+ 756.2744
0.8772

0.7695

0.6750

0.5921

0.5194

0.4556
0.5219 + 78.9480

0.5357 + 69.2550

0.5404 + 60.7500

0.5356 + 112.499

0.5216 + 93.492

8.1209 + 344.5586







10.7761+ 759.5026



Let the warrant lapse. Part D will be redeemed at the end of 6th year.

First choice

Second choice

The minimum EPS for the choice I to earn more than Rs. 970 in current value terms is the value of ‘’ in the following:

20.4946+555.5596 970

= 414.4404/20.4946

= Rs. 20.22.

Similarly in the 2nd choice the minimum EPS is value of ‘’ in the following:

10.7761+ 759.5026 970

= 210.4974/10.7761

= Rs. 19.53.

As the EPS needed is less in choice II, choice II should be desirable and should be opted by Mukesh Modi.

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5.

Price change

(in X)
Price change

(in Y)
X2
Y2
XY

2.60
2.45
6.7600
6.0025
6.37

1.45
0.60
2.1025
0.3600
0.87

0.05
29.10
0.0025
846.8100
1.455

-2.00
-14.20
4.0000
201.6400
28.4

-0.75
9.85
0.5625
97.0225
-7.3875

-1.85
-1.95
3.4225
3.8025
3.6075

0.35
4.20
0.1225
17.6400
1.47

0.00
4.30
0.0000
18.4900
0

1.80
-11.20
3.2400
125.4400
-20.16

-2.15
-0.20
4.6225
0.0400
0.43

2.10
5.15
4.4100
26.5225
10.815

1.20
5.95
1.4400
35.4025
7.14

-1.40
-1.60
1.9600
2.5600
2.24

-2.80
-11.50
7.8400
132.2500
32.2

-0.90
6.35
0.8100
40.3225
-5.715

0.20
-4.95
0.0400
24.5025
-0.99

2.45
-4.00
6.0025
16.0000
-9.8

1.40
1.85
1.9600
3.4225
2.59

0.05
21.70
0.0025
470.8900
1.085

0.25
33.30
0.0625
1108.8900
8.325

2.05
75.20
49.36
3178.01
62.94


= 2.05, == 0.1025, = 0.0105

= 75.20, ==3.76, = 14.1376

From regression analysis,











Coefficient of correlation,









Since the correlation ranging from the prices in 2 various periods is small, we conclude that the prices move in random fashion.

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part C: Applied Theory

6. Advantages of Listing

Listing of securities on the stock exchanges is advantageous to the company as well as to the investors as seen hereunder:

a. To the Company

i. The company enjoys concessions under Direct Tax Laws - In such companies the public is substantially interested resulting in lower rate of income tax payable by them;

ii. The company gains national and international importance by its share value quoted on the stock exchanges;

iii. Financial institutions/bankers extend term loan facilities in the form of rupee currency and foreign currency loan;

iv. It helps the company to mobilize resources from the shareholders through ‘Rights Issue’ for programs of expansion and modernization without depending on the financial institutions in line with the government policies;

v. It ensures wide distribution of shareholding thus avoiding fears of easy takeover of the organization by others.

b. To the Investors

i. Since the securities are officially traded, liquidity of investment by the investors is well ensured;

ii. Rights entitlement in respect of further problems can be disposed of in the market;

iii. Listed securities are well preferred by bankers for extending loan facility;

iv. Official quotations of the securities on the stock exchanges corroborate the evaluation taken by the investors for purposes of tax assessments under Income Tax Act, Wealth Tax Act, etc.;

v. Since securities are quoted, there is no secrecy of the price realization of securities sold by the investors;

vi. The rules of the stock exchange protect the interest of the investors in respect of their holdings;

vii. Listed companies are obligated to furnish unaudited financial outcomes on a half-yearly basis within 2 months of the expiry of the period. The stated details enable the investing public to appreciate the financial outcomes of the company in ranging from the financial year;

viii. Takeover offers concerning listed companies are to be announced to the public. This will enable the investing public to exercise its discretion on such matters.

kinds of Listing

Listing of securities is of 5 kinds as follows:

Initial Listing

A company, whose securities have not been listed earlier in a recognized stock exchange, if desirous of listing its securities, should follow procedures applicable to initial listing.

Listing of Public problem of Shares and/or Debentures

A company whose shares are listed on a recognized stock exchange may problem shares and/or debentures to the public for subscription. In such cases the company under the Listing Agreement has to submit necessary application to the stock exchange(s) for listing of its securities. It may so happen that a green field company, i.e., a company shortly after incorporation may problem its shares and/or debentures to the public for subscription. In that event, it has to comply with the formalities applicable to initial listing.

Listing of Rights problem of Shares and/or Debentures

Companies whose securities are already listed may problem shares and/or debentures by way of ‘rights’ to the existing shareholders. Under the listing agreement, such companies have to list shares and/or debentures allotted by way of rights to the shareholders with stock exchange(s).

Listing of Bonus problem of Shares

Companies which problem bonus shares by capitalization of its reserves, pursuant to the listing agreement should enlist with the stock exchange(s). Bonus shares should problem by submitting necessary application form for official quotation of the bonus shares.

Listing of Shares Issued on Amalgamation, Mergers, etc.

Amalgamated companies, which problem shares to the shareholders have to get the shares listed on the stock exchanges to enable the erstwhile shareholders with such shares.

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7. The attractiveness of interest rate swaps remains limited to banks and financial institutions. The majority of the corporates are constrained because of several factors as listed beneath.

i. Absence of standard benchmark rate: In the international market, there is a well-developed interbank rate which is LIBOR. Most of the players are confident about 3-month LIBOR or 6-month LIBOR. But the absence of adequate liquidity in the Indian market has resulted in non-development of an improper benchmark rate. Although MIBOR rates are being used for interest rate swap contracts, long-term MIBOR rates are yet to gain confidence among the players. The long-term benchmark rates available in the market are yet to be strong enough to generate confidence among the parties entering into interest rate swap contract.

ii. No proper market for Floating Rate Loans: The peculiar feature of Indian financial markets is that there is uniformity in thinking among the players. Because the interest rates do not fluctuate widely, the demand for floating rate loans also does not pick-up. This is a major factor responsible for poor growth of interest rate swap market. But the latest guidelines and policies of the RBI allowing the market to determine the market interest rate may increase volatility of the interest rate, which in turn would help popularize the interest rate swaps.

ii. Absence of standard yield curve in the market: It is important for a derivative market to have a proper yield curve because it facilitates determination of the bid-ask spread and forward market movements. A proper yield curve with respect to the Indian Rupee market is yet to be developed. The players have very little confidence on the existing yield curve.

iv. Skepticism in the players: The players in the financial market are skeptical to reap the full advantage of economic liberalization. Very few banks have resorted to innovative practices. Uniformity in practice is yet to gain momentum. For example, very few banks have adopted differential PLR. The growth in interest rate swap can pick-up if more and more banks declare differential PLRs.

v. Poor information: Lack of proper info about the interest rate swap itself hinders the growth. The Swap market is still in its nascent growth stage. The participants in the market have yet to learn the trade. Mastering the trade is a distant dream. This inadequate knowledge forbids the players to take up large scale interest rate swap transactions.

vi. Till now the banks and financial institutions have perceived that interest rate swap benefits can only be reaped by the large-scale corporates. The small banks and corporate houses have little to benefit from these transactions. This perception forbids the small banks and corporates to go for the interest rate swap contract. It is necessary that these small houses realize that they can also get advantage from entering into interest rate swap if proper attention is being paid to these contracts.

Thus, apart from the above underlying broad factors, few other factors are also responsible for prohibiting the growth of interest rate swap contracts. They are:

i. Unstable political environment

ii. Slower implementation of economic reforms

iii. Absence of liquidity in the debt market

iv. Cheaper accessibility to funds

v. Core emphasis on the growth of stock market than on derivative markets

vi. Lack of strong underlying assets for derivative markets.

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Earning:   Approval pending.