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

ques. Paper
Security Analysis-II (212) : July 2006


part D : Case Study (50 Marks)

· This part consists of ques. with serial number one - 6.

· ans all ques..

· Marks are indicated against every ques..

· Do not spend more than 80 - 90 minutes on part D.

Case Study

learn the case carefully and ans the subsequent questions:


1.
Analyze the Indian Textile industry based on the SWOT Analysis and provide your opinion on the long-term prospects of the industry.

(10 marks)
< ans >

2.
Analysts opine that a realistic estimate of the cost of equity of Apparel industry can be made by using the subsequent formula:

Rf + two × DE + 0.11 × CVROE

Where, DE is avg. debt equity multiple and CVROE is coefficient of variation of ROE(%). The yield on 91-day T-bill is 5.5%. Using the data given in Annexure I, calculate the cost of equity of Arvind Mills.

(5 marks)
< ans >

3.
Analysts feel that the sale of the company is the major determinant for valuing the company’s value per share. calculate

a. The value per share based on the company specific relative evaluation. Cost of equity for the company specific data is based on the findings derived in the ques. above.

b. The value per share based on the industry specific relative evaluation.

(Use Price to Sales ratio for the evaluation of the company)

(6 + six = 12 marks)
< ans >

4.
Sometimes the Price to sales ratio can even be a contrary indicator of a company’s evaluation. Elucidate. Also suggest a few similar better tool for evaluation.

(10 marks)
< ans >

5.
An Analyst considers the 30-Day Moving avg. Chart (MAC) for his buy-sell decisions (Annexure II).

a. Indicate every buy-sell signals on MAC

b. compute the realized gain/loss made at every sell, if he follows the signals given by 30-day MAC

c. Compare the net gain/loss of the strategy adopted in part (b) with that of buy and hold strategy.

(You can presume transaction cost for purchaser to be 0.5% and for seller to be 0.75% per transaction)

(Clearly state your assumptions.)

(2 + five + one = eight marks)
< ans >

6.
tech. Analysts observe moving avg. more for ‘crossovers’ than for the modifications in direction and find more clear-out buy-sell signals than those obtainable from trendlines. With respect to this, explain the principles followed by moving averages.

(5 marks)
< ans >

INDIAN TEXTILE INDUSTRY

The WTO and the Textile industry

The problem of cotton subsidies in developed countries is 1 of the most contentious and challenging 1 for the World Trade Organisation (WTO). In the past the WTO has maintained that cotton should not be considered separately from other agricultural products, and the USA has supported this stance. However, the WTO stance was formally broken at the Doha Round ministerial conference in Hong Kong in December 2005, after a concerted two-and-a-half-year campaign by 4 West African cotton producing nations—Benin, Burkina Faso, Chad and Mali, known collectively as the C-4 group. The C-4 group was aided in its campaign by a legal challenge launched by Brazil against US cotton support policies in 2002. Brazil’s challenge helped to raise the profile of the C-4 group’s campaign and to secure worldwide coverage and widespread sympathy for the plight of the C-4 countries. All agricultural export subsidies will be eliminated by 2013 and domestic subsidies gradually decreased. In the case of cotton, developed countries are to eliminate export subsidies in 2006. Also, they will grant duty-free and quota-free access to exports from lowest developed countries (LDCs), although no timetable for this has been agreed. Domestic subsidies aimed at encouraging cotton growing will be gradually eliminated, and the WTO will obtain a way of channelling development assistance in order to mitigate poverty and improve the competitiveness and efficiency of cotton growing in lowest developed countries. However, a few of these ambitions are likely to be strongly opposed in developed countries. Achieving them could therefore prove challenging.

Earning:   Approval pending.