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Investment Planning – Valuation of Equity Practice Questions

Posted by Prashant Shah on October 9, 2011

Investment Planning – Valuation of Equity

1 The companies in which significant amount of shares are held by the parent who also exerts some influence in the activities is known as__________.(a)   Associated companies

(b)   Wholly owned subsidiaries

(c)    Partly owned subsidiaries

(d)   Unlimited companies

2 For the Previous Year 2006-07, XYZ Ltd., a domestic company, pays an interim dividend in October 2006 of 15% and a final dividend of 40%. The distribution tax is payable on _________.(a)   Both interim and final dividend

(b)   Only the final dividend

(c)    Only the interim dividend

(d)   On neither the interim nor the final dividend

3 An equity shareholder has the following right_______.

  1. He can legally demand information from the company and gain access to its books.
  2. He can vote for the common shareholders. dividend
  3. He can vote for the preference shareholders. dividend

(a)   1

(b)   2

(c)    3

(d)   1, 2 & 3

4 A Preference Shareholder enjoys priority over common stockholders in respect of_______.

  1. Dividends cannot be paid to common stockholders unless he receives the stated dividend.
  2. In the event of liquidation, he is paid before the common shareholders.
  3. He can elect the Chairman of the Board of Directors.
  4. He can vote for dividend to be paid to the equity shareholders.

(a)   Both (3) & (4) are true, but (1) & (2) are false.

(b)   (1), (2), (3) & (4) are true.

(c)    Both (1) and (2) are true, but (3) and (4) are false.

(d)   None of the above

5 Find Beta of security X if expected market premium is 15%, risk free return is 7% and expected return of security X is 20%?(a)   0.834

(b)   0.900

(c)    0.700

(d)   D) 0.867

6 A company’s current dividend is Rs. 6. However it is constantly falling @ 5% per annum. If the discount rate is 15% what is the value of its share?(a)   Rs. 63.00

(b)   Rs. 23.75

(c)    Rs. 28.50

(d)   None of the above.

7 A company offers a rights issue of one for two for Rs. 7 each. The current market price is Rs. 13. The expected ex-right market price would be Rs. _______.(a)   9

(b)   10

(c)    11

(d)   None of the above

8 Assume a company has issued Ten lakh equity shares and its current market price is Rs. 80. Last year’s profit was Rs. 90 lakh out of which Rs. 50 lakh was distributed as dividend. What is the earning yield?(a)   8.89%

(b)   11.25%

(c)    6.25%

(d)   16.67%

9 Risk free rate of return is 8%, expected market premium is 15% and Beta of security is 0.80. What is the expected rate of return of the security?(a)   13.6%

(b)   15.00%

(c)    12.00%

(d)   20.00%

10 You buy a growth-oriented non-dividend paying share for Rs. 200 and 4 years later you sell it for Rs. 350. The compound annual growth rate is _____.(a)   A 10.3%

(b)   B 18.8%

(c)    C 75%

(d)   15%

11 ABC Ltd’s stock has a current dividend of Rs. 1.75 that is growing at 8%. If the stock is currently selling for Rs. 100 and your required rate of return is 10%, will you buy the stock at today’s price?(a)   Yes, because the stock is a good buy based on a risk-return relationship.(b)   No, because the stock is overvalued based on the dividend growth model.(c)    No, because the stock is a bad investment based on a risk-return relationship.

(d)   Yes, because the stock is undervalued based on the dividend growth model.

12 If a new issue was offered to the public at 15 times earnings but the market was pricing similar shares at 19 times, this would be _____________. (a)   Appalling proposition to the investor

(b)   The investor cannot take a position

(c)    An example of low gearing

(d)   Bargain not to be missed

13 The best method of valuing a share is:(a)   Book value based on net tangible assets.

(b)   Liquidation value based on the proceeds of liquidation of the company.

(c)    Present value of all the dividends to be received from holding that share.

(d)   Apply the P / E ratio to expected earnings per share.

14 You are running a Dividend Yield Fund for a leading Mutual Fund House. The most recent dividend of All Is Fine Business Services common stock was Rs 2.35. The dividends are expected to grow at 4 percent indefinitely. If you are looking at a 12 percent return, how much will you be willing to pay for one share of All Is Fine Business Services?(a)   Rs. 24.79.

(b)   Rs. 29.38.

(c)    Rs. 29.38.

(d)   Rs. 30.55.

15 If ABS‟s price is Rs.40 per share and its current dividend of Rs.3.85 per share, which is growing at a 7 percent rate per year, determine its required return?(a)   16.2 percent

(b)   15.1 percent

(c)    16.6 percent

(d)   17.3 percent

(e)   18.2 percent

16 If ABS‟s pays dividend of Rs.3.85 per share which is growing at a 7 percent rate per year and is expected to grow at the same rate in future. Its required rate of return is 14.5% Determine its share value.(a)   52.48

(b)   49.25

(c)    54.93

(d)   55.75

(e)   (e) 47.26

17 A company has current earnings per share of Rs.6. Assume a dividend-payout ratio of 55 percent. Earnings grow at a rate of 8.5 percent per year. If the required rate of return is 15 percent, what is its current value?(a)   Rs.51.33

(b)   Rs.55.08

(c)    Rs.57.02

(d)   Rs.52.05

(e)   Rs.50.75

18 Calculate the price earnings ratio (PER) of the stock of Company A, with the following information:            Price = 4.00            Profit before tax = 66.0 million            Profit after tax = 48.0 million

            Paid up Capital = 120 million

            At par value of 0.50 per share

(a)   7.3

(b)   10.0

(c)    20.0

(d)   14.5

19 Shown here are the following data on two companies in the same industry.Company A  MP = 60  DPS =10  EPS =17.5Company B  MP = 22  DPS =12  EPS =22

What is the dividend yield of A Ltd

(a) 16.67%

(b) 15.00%

(c) 16.50%

(d) 17%

What is the dividend yield of B Ltd

(a) 32%

(b) 25.50%

(c) 28.00%

(d) 30%

P/E Ratio of A Ltd is

(a) 3.43

(b) 3.80

(c) 3.40

(d) 3.00

P/E Ratio of B Ltd is

(a) 1.82

(b) 2.00

(c) 1.50

(d) 1.60

20 XYZ‘s price is Rs.35 per share and its expected dividend is Rs.4.20 per share, which is growing at the rate of 8% per annum. Determine the Required rate of return?(a) 20%

(b) 18%

(c) 19%

(d) 19.5%

21 If ABC pays dividend of Rs.3.85 per share which is growing at a 7 percent rate per year and is expected to grow at the same rate in future. Its required rate of return is 14.5%. Determine its share value.(a) 52.48(b) 49.25(c) 54.93

(d) 55.75

(e) 47.26

22 A company has current earnings per share of Rs.7. Assume a dividend payout of 60%.Earnings grow at a rate of 8% per year If the required rate of return is 15 percent, what is the current share value?(a) 64.80(b) 65.20(c) 63.56

(d) 68.35

23 A growth oriented non dividend paying share is bought for Rs.250 and sold Rs.450 after 5 years, the compound annual growth rate is:(a) 14.86%

(b) 12.47%

(c) 11.50%

(d) 10.71%

24 The price of Stellar Ltd is currently Rs.40. The dividend next year is expected to be Rs.4.00. Required return on stocks is 12%. Find the expected growth rate under theConstant Growth Model.(a) 2.00%(b) 2.25%

(c) 1.90%

(d) 2.75%

25 ABC Company paid a dividend of Rs.5.40 during the year 2005. Amit had bought a share at Rs.61.20 at the beginning of the year. ABC’s price at the end of the year isRs.72.40. Find the total return on the stock.(a) 25.54%(b) 8.85%

(c) 27.12%

(d) 19.20%

26 Using the Gordon Constant Growth Model, Calculate the price of stock of company A,with the following information            EPS = Rs. 10 per share            Current Dividend = Rs. 8 per share

            Dividend Growth rate 5%

            Risk free rate = 6%

            Risk Premium = 7%

(a) Rs. 115/-

(b) Rs. 105/-

(c) Rs. 100/-

(d) None of the above

27 Which of the following have a negative impact on stock prices:

  1. Increase in Risk Premiums
  2. Increase in dividend Growth Rate
  3. Increase in Dividend Rate
  4. Increase in Interest Rate

(a) 1, 2 & 3 only

(b) 1, 2 & 4 only

(c) 1, 3 & 4 only

(d) 2, 3 & 4 only

28 Company ABC is currently trading at Rs. 35 and pays a dividend of Rs. 2.30. Analysts’ project a growth rate of 4%. Your client requires a rate of 9% to meet his stated goal and wants to know whether he should purchase stock in company ABC.(a) Yes, the stock is undervalued

(b) No, the stock is overvalued

(c) Yes, the required rate is higher than the projected growth rate.

(d) No, the required rate is lower than the expected rate.

29 The Zeta Corporation’s current dividend is Rs. 3.85. If future dividends are expected to grow at 4% forever, which of the following amounts should Zeta stock sell for if the required rate of return on the stock is 14%. (a) 28.57

(b) 38.50

(c) 40.04

(d) 41.60

30 The equity share of Abhishek Industries is currently selling at Rs. 25 per share. The dividend expected next year is Rs. 2.50. The investors required rate of return on the stock is 15 percent. If the constant growth model applies to Abhishek Industries, what is the expected growth rate?(a) 15%

(b) 5%

(c) 11%

(d) None of the above

31 Fizzle Ltd. is facing gloomy prospects. The earnings and dividend are likely to declineby 4%. The previous dividend was Rs. 1.50. If the current market price is Rs. 8.00, whatrate of return do investors expect from the stock?(a) 18%

(b) 22%

(c) 14%

(d) None of the above.

32 A share’s earnings and dividends have been growing @18% per annum. The growth rate is expected to continue for 4 years. After that the growth rate will fall to 12% for the next 4 years. Thereafter the growth rate is expected to be 6% forever. If the last dividend per share was Rs. 2.00 and the investors required rate of return on the stock is 15 %, what is the intrinsic value per share?(a) 16.83

(b) 23.49

(c) 40.32

(d) None

33 A company’s reserves are fast depleting and its sales are declining in recent years. Its’ costs of production is also on the increase. Because of these reasons, the company’s earnings are declining and dividends are expected to fall by 5% per annum. Current dividend is Rs. 5 and the discount rate is 15%. What is the value of the share?(a) 20

(b) 21.25

(c) 23.75

(d) 19

31 Responses to “Investment Planning – Valuation of Equity Practice Questions”

  1. Harshil Roy said

    Hi,

    I have a question which is asked in RP module of CFP.

    Kindly help me with the question.

    Question is as under:

    The inflation linked annuity of a retirement plan reviewed every quarter on the basis of average inflation prevailing during the immediately preceding quarter, started at Rs. 40000/- p.m. when the base inflation was 7% p.a.

    If the average inflation for the quarter, during the year were 3.5% p.a., 5% p.a., 7.3% p.a. & 9.8% p.a. respectively. Find the monthly annuity in the first quarter of succeeding year.

    1) 42549

    2) 42560

    3) 42328

    4) 43365

    • Harshil,

      Nice to catch you on my blog. You can meet me and discuss the question.

      Prashant Shah

    • Dear Harshil,

      I calculated the question as follows, pls tell if any corrections are required:

      Current Year
      Q-1: 40,700 pm
      Q-2: 41,056 pm
      Q-3: 41,569 pm
      Q-4: 42,371 pm

      Next Year
      Q-1: 43,365 pm

      An interesting question.

      Prashant Shah.

      • Vinayak said

        Prashant,

        Can you provide the detailed working for the answer? It will be very helpful.

        Thanks

        Vinayak

      • Dear Vinayak,

        It is tough to write solution of all the questions but if you have doubt in any specific question, you can put a queery. I will give the solution.

        Regards,
        Prashant V Shah

  2. Vinayak said

    Dear Prashant,
    I just need the detailed solution for the question posed by Harshil reg. the inflation linked annuity which you mentioned as an ‘ interesting question’.

    I may mention here that I am a regular follower of your blog and it has helped me very much. Keep up the good work.

    Thanks

    Vinayak

    • Dear Vinayak,

      I will post the solution. And indeed that was an interesting question.

      Prashant.

    • Dear Vinayak,
      find the solution,
      We have base of 40000 and applicable inflation is 7%p.a. Hence quarterly is 1.75%
      Q-1 monthly annuity is 40000*1.0175 = 40,700 pm
      Q-2 monthly annuity is 40700*1.00875 = 41,056 pm
      similarly,
      Q-3: 41,569 pm
      Q-4: 42,371 pm
      Q-5: 43,365 pm

      Regards,
      Prashant.

  3. plz see the question no 11 in derivative covered call

    i think answer would be 35 buying the security in the cash market for 38-3 received for the writing the call 35

    So ans will 35 sir .plz do have a look again.
    if in this question spot close at expiry so ans would be 5
    2 rs from cash market +3 from premium.=5

    • Dear Sadasiv,

      You are right. there is an error in the answer of Q-11. I have corrected the same and the correct answer is Rs.35. You can see the updated solutions.

      Thanks for the observation. Keep suggesting if there are any more errors.

      Regards,
      Prashant V Shah.

  4. sorry it close at 40 so ans is 5 rs

  5. Dear Sir plz see the risk and return Q no 1
    3rd standard deviation portfolio the right ans is not in the list the answer is 15.206.
    sir what is the answer of risk return Q no i getting d is it right or wrong Stock I and III are undervalued whereas stock II is overvalued?
    Question no 6 plz rectify DPS AS EPS .

    what will be the q no 8 i getting b -..375?
    plz see the question no 10 zeenath ltd beta is 1.17 not 1.02
    Q no 11 ms anne 15.90 not 15.09
    sir how to solve q no 12 sms ltd ?

    I respect you but i want to be share what is right it can be wrong also plz don’t mind

    thanx for your reply

    • Dear Sadasiv,

      Q-1: to be answered using alpa as the question is regarding undervaluation and overvaluation.
      Q-6: DPS is the correct term which has been used because DPS is the return to the equity share holder and we are calculating holding period return
      Q-8: ans is -0.375. solution is [-0.25*15*10/100]
      Q-11: weighted beta of the portfolio is 1.01 and hence the answer is 15.09%

      Thanks for observation,
      Prashant V Shah.

  6. Q no 6 what is the begin price

    how to solve q no 12 sms ltd could you elaborate plz?

  7. valuation equity q no 5 i m getting .61 means 70 %

    capm= rf+beta (rm -rf)
    20=7+b(15-7)
    20-7=b8
    so 8/13 = .6153 so gross up .70

    • Dear Sadasiv,
      There is a difference between return on market and market premium. Market premium means Rm-Rf. Hence in the question the solution is 20=7+15B.

      Prashant.

  8. valuation equity question no. 9 ans is 13.60
    check also type of question fpsb mock test q no 22

  9. thanx a ton sir

    Question no 26 and 32 in valuation of equity could you elaborate plz. i m stupid in that question ?
    Is there any shortcut to find out Macaulay duration in coupon bond question ……

  10. Plz see the question no 9 fpsb site on same kind of question solve by capm model . question no 22 mock test on fpsb website.Is it right or wrong ?

  11. I m afraid Sir you are right now i understand return on market premium is Rm -Rf i was not affair of thanx a lot sir …you are competent your knowledge area

    It is kind to thanking you respond my question

  12. What is the dividend yield of B Ltd

    (a) 32%

    (b) 25.50%

    (c) 28.00%

    (d) 30% sir i m not getting hw to come could you explain ..

  13. sir what is the right answer of q no 1

    risk and return sir i m getiing two answer which one is right 21 16.5 20.4

    -2 -2.5 +1.6 ?

  14. chandni said

    Sir

    can u solve the detail solution for the Q18 and Q32?

    Chandni

  15. vidhi said

    Sir
    can u provide me solution of valution of equity Q 7 & 8

  16. jyoti1752 said

    Hello prashant sir
    these problems contain from equity valuation blog

    sir in Q.18 which formula can be used to find price earning ratio

    and Q.26 beta has not given so we cant find requred return

    Q.7&Q.8 sir i dont have any idea to solve both questions pls help me to solve above question

    regards
    jyoti singh

    • Manish said

      Dear jyoti,

      For question no. 18, solution as follows:
      Earnings per share = Profit After Tax / No. of Shares
      No. of shares = 120 million / 0.5 = 240 million
      hence Earnings per share = 48 million/ 240 million = 0.20
      Price to Earnings ratio = price/earnings = 4/0.20 = 20.

      In question no:-26,you should have known that risk premium = b(rm-rf).so in question risk premium is given as 7%.

      therefore required rate of return = 6%+7%=13%.

      price of stock = d1/(ke – g)
      price of stock=8.40/(13%-5%)
      price of stock= 105.

      7.] Rights issue: For every 2 shares we get 1 share.Current Market Price for 2 shares = 2 * 13 = 26, Price for rights share = 7.Total price for 2 shares and rights share = 33. Ex-right Market price = 33/3 = 11.

  17. jyoti1752 said

    Hi manish
    pls post the solution of Q. 8

    Assume a company has issued Ten lakh equity shares and its current market price is Rs. 80. Last year’s profit was Rs. 90 lakh out of which Rs. 50 lakh was distributed as dividend. What is the earning yield?
    Answer : 11.25%

    above you send the solution of Q 26. bt risk premium is only (rm-rf) ,and beeta is risk measure then how can you say b(rm-rf) is whole risk premium pls explain it

    Regards
    jyoti singh

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