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

The stock is expected to have a beta of 1.45 for the high growth period (2006-2010), and it is expected to decline to 1.10 by the time the firm goes into steady state (in 2015). The risk-free rate is 5.5%, and the market return is 12%.

You are needed to estimate the current value per share, using the Three-Stage FCFE model.

(11 marks)




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3.
Considering that the assumptions of CAPM are valid, fill in the blanks in the subsequent table:

Stock
Expected Return (%)
si (%)
ri,m
Systematic Risk (%)2

Akhil Infotech Ltd.
–
7
–
12

Bewan Pharma Ltd.
9
–
1.05
5

Cute Textiles Ltd.
14
–
1.2
18


presume that the variance on the market return is 9(%)2.

(5 marks)
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4.
An analyst is considering an investment in the structured products. An investment in a 5-year bond with 50 warrants per Rs.10,000 is proposed. The coupon rate for the bond is 9.5% and the bond is trading at par value of Rs.100. 5 warrants provide right to buy one stock of the company at Rs.200. Currently the stock is trading at Rs.320.

You are needed to

a. compute the price of the bond without warrants, if the market shows a redemption yield for bonds of the identical quality and maturity of 12%.

b. compute the implicit price of 1 warrant. provide the cause for any difference from the intrinsic value.

c. explain how price volatility of the share is attached with the pricing of the warrant.

(1 + five + two = eight marks)
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5.
A market analyst is keen on testing whether the Indian markets are exhibiting semi-strong form of efficiency. For the purpose he opted 3 companies, viz., Arun Motors Ltd., Bimal Infotech Ltd. and Celine Airlines Ltd., which declared higher dividends on March 15, 2006. He estimated the characteristic lines to study the relationship ranging from the returns on these 3 companies and the return on the market index for a period of 5 years on a monthly basis up to December 15, 2005, which are as follows:

rA,t = 1.40% + 0.75rm,t

rB,t = 1.59% + 1.23rm,t

rC,t = 1.92% + 1.40rm,t

The subsequent table indicates the returns on the stocks of the 3 companies and the market return for the period 3 months before and 3 months after the declaration of dividend:

Period (months)
true Return (%)
Market Return (%) rm,t

Earning:   Approval pending.