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Archive for October, 2011

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


Posted in Practice Questions | 31 Comments »

The Complete Collection of Map and Parliament Theme, 50 Paisa Coin

Posted by Prashant Shah on October 1, 2011

We must have used many of these coins. See how beautiful they look when put together.

Posted in Numismatics India | 1 Comment »