1999 1998 1997 1996
Dividendpershare `1.62 1.58 `1.42 1.26
Payoutrate(DPS/EPS) 53.8% 65.8% 39.3% 39.4
%
EarningspershareEAT/No.ofshares `3.01 2.40 3.61 3.2
BookValuepershare `19.18 17.68 17.91 15.65
RateofReturnonEnquiry 15.9% 13.6% 20.3% 20.4
%
EffectiveTaxrate 67% 50% 61% 39%
RateofReturnonAccess 13.2% 14.9% 17.2% 18.1
%
ProfitMargin(EBITSales) 7.7% 8.3% 9.9% 10.3
%
Q1. Analyze above ratios.
View Based, answer based on ratio anlaysis
2. Following are data for Anand Products (Rs in lakhs)
1998 1998
Assets 4000 Revenues 9600
Short term Liabilities 250 Operating Exp. 8750
EBIT 850
8% Debenture 1750 Interest 250
10% Bonds 300 EBT 600
Common Stock (` 10 par) 2500 Taxes 100
Surplus 500 Dividend 50
Find out the following ratios
i) Asset turnover
ii) Effective interest rate
iii) Effective tax rate
iv) Debt/equity ratio
v) Dividend payout rate
b) What growth rate of EBIT can be expected?
Given in attached sheet
3. Anaiveinvestorwantstoanalysethecapitalstructureofacompany.Hehasthefollow
inginformationABCCompany.
1990 1995 1998
Long-termdebt(11%) 32.27 19.46 21.19
Preferredstock(10%) 0.18 0.18 0.14
Commonstock(Par`10) 0.01 0.14 12.6
Capitalsurplus 8.67 4.35 4.19
Retainedearnings 43.93 80.3 128.2
1
Dividendpaid 3.005 3.68 10.08
4
The present price of the share in Mumbai stock market is ` 450. There is
a rumourin the market that the ABC Company may issue bonus shares shortly.
The investor wantstheanswersforthefollowing
a) Is there any groundfor such rumour?
b) Isthecapitalstructuresound?
c) Isitpropertopurchasetheshares?
Analysethegivendataandadvisehim.
View based answer
4. Mahima wants to invest in the one of the three companies given below. She is
very particularabout the current financial position of the company. She
believes that no company
shouldbeconsideredforinvestmentunlessithasagoodcurrentfinancialposition.Y
ouareaskedtoexaminethefollowingdataandchooseacompanyforher by
ranking alternatives available.
CurrentfinancialanalysisofX,Y,Zcompanies
Ratio X Y Z
1998 1999 1998 1999 1998 199
9
CurrentRatio 2.1 2.5 2.0 2.26 2.71 2.5
3
AcidtestRatio 1.27 1.42 1.38 1.50 1.90 1.7
6
Compositionofcurrentassets%
Cash 18 18 54 49 44 44
Receivables 68 66 34 46 53 52
Inventory 45 47 33 35 31 31
OtherCurrentAssets 4 4 9 10 2 3
Netsalestoinventory 3.90 3.77 4.45 4.23 5.65 5.2
5
NetsalestoworkingCapital 3.29 2.97 3.10 2.81 2.87 2.8
5
a. Find out the following ratios:
i. Asset turnover
ii. Effective interest rate
iii. Effective tax rate
iv. Debt/equity ratio
v. Dividend payout rate
b. What growth rate of EBIT can be expected?
Can’t be calculated with given data
5. Aninvestorwantstomakehisinvestmentin“A”companybasedonhisanalysisof
thebalancesheetandtheincomestatement.Thedetailsaregivenbelow:
BalanceSheetof“A”company-
1999(`inmillion)
Currentassets 800
Fixedassets 400
0
Totalassets 240
0
Currentliabilities 400
Long-termliabilities 800
(@9%interest)
Net worth 800
Totalliabilitiesand
Networth 340
0
Incomestatementof“A”company
1999 1
(Rsin 9
9
8
m
ill
io
n
s)
Sales 4 4,740
,
9
2
0
Less:Costofgoodssold 2 2,000
,
2
0
0
Grossprofit 9 940
2
0
Less:Operatingexpenses 4 800
4
0
EBIT 4 240
0
Assumethat,“A”companypays`54millionperyearasinterestexpense,isinthe
30% tax bracket and pays out 40 per cent of its after tax earnings as cash
dividends. Carryout the financial analysis andfind out the answer forthe
following questions:
a) WhatisthereasonforthefallintheEBITin1999?
Whatistherateofgrowthofearningsifthecompanydoesnotraise
Please look at statement and answer
6. .
Letusconsideraportfoliowithfoursecuritieshavingthefollowingcharacterist
ics, calculate portfolio return and risk.
SecurityRetur (pe cent) Proportio of investmen
ns r n t
A 14 0.2
B 19 0.3
C 13 0.1
D 20 0.4
Risk calculation is too tough in case of four security, however if two security
is given I have given formula in one of the answer. Portfolio return calculation
is given in attached sheet
7. Calculate the expected return and variance of a portfolio comprising
two securities,assuming that the portfolio weights are 0.75 for security 1
and 0.25 for security 2. Theexpected return for security 1 is 15 per cent
and its standard deviation is 12 per cent,while the expected return and
standard deviation for security 2 are 24 per cent and 20percent
respectively. The correlation between the two securities is 0.6.
Answer given in attached sheet
8. Consider two securities, P and Q, with expected returns of 25 per cent
and 23 percent respectively, and standard deviation of 35 per cent and
52 per cent respectively.Calculate the standard deviation of a portfolio
weighted equally between the twosecuritiesiftheircorrelationis-0.9.
Answer given
9. Aportfolioisconstitutedwithfoursecuritieshavingthefollowingcharacteristi
cs:
Securit Return(percen Proportionofinvestme
y t) nt
P 17.5 0.15
Q 24.8 0.25
R 15.7 0.45
S 21.3 0.15
Calculatetheexpectedreturnoftheportfolio.
Answer given
10.Aninvestorownsaportfoliocomposedoffivesecuritieswiththefollowin
gcharacteristics:
Randomerrortermstandar
Securit Beta Proportio
ddeviation(percent)
y n
1 1.35 5 0.10
2 1.05 9 0.20
3 0.80 4 0.15
4 1.50 12 0.30
5 1.12 8 0.25
If
thestandarddeviationofthemarketindexis20percent,whatisthetotalriskoft
heportfolio?
Answer Given
11.Security J has a beta of 0.75 while security K has a beta of 1.45. Calculate
the expectedreturn for these securities, assuming that the risk free
rate is 9 per cent and theexpectedreturnofthemarketis12percent.
Answer Given
12. A security pays a dividend of `4.85 and sells currently at `85. The
security is
expectedtosellat`90attheendoftheyear.Thesecurityhasabetaof1.15.Theriskfr
eerateis5percentandtheexpectedreturnonmarketindexis14percent.Assessw
hetherthesecurityiscorrectlypriced
To assess whether a security is correctly priced, we need to calculate (a)
the expectedreturn as per CAPM formula, (b) the estimated return on the
security based on the dividendandincreaseinpriceovertheholdingperiod.
Answer Given
13. Thefollowingdataareavailabletoyouasportfoliomanager: calculate r
Security Estimatedreturn(percent Bet Standarddeviation(percen
) a t)
A 20 2.0 30
B 35 1.5 35
Calculate expected return of each security than return of portfolio
considering equal weights. Though the information is incomplete.
14.Estimate the Sharpe Ratio (SR) and Treynor Ratio (TR) for
evaluating three Mutual Funds A, B, and C, we will need the
following information:
The average annual return of each mutual fund.
The standard deviation of returns for each mutual fund.
The beta of each mutual fund with respect to the market
(market risk premium = Market return - Rf).
"Mutual Fund A:
Average Annual Return = 19%
Standard Deviation = 13%
Beta = 1.6
Mutual Fund B:
Average Annual Return = 16%
Standard Deviation = 14%
Beta = 0.9
Mutual Fund C:
Average Annual Return = 28%
Standard Deviation = 14%
Beta = 1.5"
Answer Given
15. Prioritize the best from the following information and rank them . Consider following
information regarding three Mutual Funds A, B, C. Calculate Sharpe Ratio, Treynor Ratio,
and rank them . Rf = 10%
Mutual Fund - A, B, C ; Average annual return AR(%) - 20 , 22 , 18; Standard deviation SD(%)
- 23, 24 , 25 ; Beta - 0.8 , 0.9 , 1.2
Similar to Q14
16. You are an investment advisor assisting an investor in choosing between two securities, X
and Y, for potential investment. Security X has expected returns of 6%, 8%, 10%, and 15%
with corresponding probabilities of 0.1, 0.3, 0.4, and 0.2, respectively. Security Y has
expected returns of -2%, 8%, and 17% with probabilities of 0.2, 0.5, and 0.3, respectively.
Calculate the expected returns and standard deviations for both securities and provide your
analysis on which investment option might be more suitable based on risk and return
considerations.
You are considering buying a stock with a beta of 0.73. If the risk-free rate of return is
6.9 percent, and the expected return for the market is 12.2 percent, what should the
expected rate of return be for this stock?
ii)If the risk-free rate is 6.9%, the market risk premium is 7.0%, and the expected return on
Security J is 29.4%, what is the beta for Security J?
iii)You are considering buying a stock with a beta of 2.05. If the risk-free rate of return is
6.9 percent, and the market risk premium is 10.8 percent, what should the expected
rate of
return be for this stock?
iv)You are holding a stock that has a beta of 2.4 and is currently in equilibrium. The
required return on the stock is 20.4% and the return on a risk-free asset is 8%. What
would
be the return on the stock if the stock's beta increased to 3.3 while the risk-free
rate and market return remained unchanged?
Apply CAPM
