NISM SERIES XV - RESEARCH

ANALYST CERTIFICATION EXAM

 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

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 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

PRATICE TEST NO. 6

Question 1 Behaviourally an investor may have won but financially, it may be a loss.
Which is this bias ?

(a) Ownership bias

(b) Anchoring

(c) Gambler’s fallacy

(d) Winner’s curse

Question 2 A sense of quality of business being good can be judged by its future
financial projections. - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 1 Winner’s curse

Answer Winner’s curse - The tendency to win a competitive bid even after overpaying for the
Explanation asset. While behaviorally it is a win, financially, it may be a loss.

Correct Answer 2 FALSE

Answer A sense of quality of business being good can be judged by its historical ie.
Explanation last 5-10 years financials.
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 3 Discounted Cash flow model can be used only when three things are
known with certainty- Stream of future cash flows, Timings of these cash
flows, and discount rate - State True or False ?

(a) TRUE

(b) FALSE

Question 4 If an investor is not be able to sell his investment when desired, or it has
to be sold below its intrinsic value, or there are high costs to carrying out
transactions then this risk is called as _______ .

(a) Transactional Loss Risk

(b) Liquidity Risk

(c) Reinvestment Risk

(d) Credit Risk

Correct Answer 3 TRUE

Correct Answer 4 Liquidity Risk

 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 5
FDI leads to job destruction in the economy - State True or False ?

(a) TRUE

(b) FALSE

Question 6 Nestle Nescafe is an example of pricing power as prices keep going up but
volumes don’t fall - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 5 FALSE

Answer Foreign Direct Investment - FDI has multiple benefits in addition to bring in
Explanation capital to the country. they are :
- Job creation
- New technologies
- New managerial skills
- New products and services

Correct Answer 6 TRUE

Answer Pricing power is a function of industry dynamics, elasticity of demand
Explanation and branding and customer loyalty/addiction.
Presence of strong brands and/or virtual monopoly play an important factor in
the pricing power.
The brand Nescafe enjoys a very strong brand loyalty.
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 7 Business risk is also known as operating risk, because this risk is caused
by factors that affect the operations of the company. State True or False?

(a) TRUE

(b) FALSE

Question 8 The sales of Jupiter Trading Co Ltd. was Rs 750000 and the cost of goods
sold were 25 % of sales. Operating Expenses and Depreciation were Rs
233000. The Interest expenses were Rs 140000. Calculate the Net Income
if the company pays 25% of its pretax income as tax.

(a) Rs 142125

(b) Rs 163700

(c) Rs 167230

(d) Rs 175400

Correct Answer 7 TRUE

Correct Answer 8 Rs 142125

Answer Sales = Rs 750000
Explanation Less : Cost of Goods sold (25% of Sales) - Rs 187500
Less : Op Expenses and Depreciation - Rs 233000
Less : Interest Expenses - Rs 140000
Income before Tax = Rs 189500
Less : Tax at 25% on Rs 189500 - Rs 47375
Net Profit = Rs 142125
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 9 The paid up capital of the company is Rs 2500000 with face value of Rs 5
per share. The P/E ratio of a company is 12 and the EPS is Rs 7.
Calculate the Enterprise Value of the company if it has zero debt and Rs
33 lakhs as cash equivalents.

(a) Rs 5000000

(b) Rs 27400000

(c) Rs 42200000

(d) Rs 38700000

Question 10 The Earning per Share of a company is Rs 25 and the Book Value per
share is Rs 75. The Market Capitalisation of this company is Rs.
75,00,000. Calculate the Return on Capital Employed.

(a) 30%

(b) 33.33%

(c) 45.33%

(d) 100%

Correct Answer 9 Rs 38700000

Answer No of Shares = Paid up Capital / Face Value
Explanation No of Shares = 2500000 / 5 = 500000
PE ratio = Market Price / EPS
12 = Market Price / 7
So the Market Price = 12 x 7 = 84
Market capitalisation = No. of shares x Market Price
= 500000 x 84 = 4,20,00,000
Enterprise value = Market capitalization + Market value of debt – cash and
cash equivalents
= 42000000 + 0 - 3300000 = 38700000

Correct Answer 10 33.33%

Answer Return on Capital Employed is similar to Return on Equity.
Explanation Return on Equity = (Earning Per Share / Book Value) x 100
= 25 / 75 x 100
= 0.3333 x 100
= 33.33%
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 11 The EPS of a company is Rs 28 and the PE Ratio is 7. What is the current
market price of the company stock ?

(a) Rs. 4

(b) Rs. 196

(c) Rs. 35

(d) Rs 21

Question 12 In Structure Conduct Performance (SCP) Analysis, if an analyst is

studying whether the business is cyclical in nature or not or how
customers choose the products/services etc, then he doing a _______
analysis.

(a) Structure

(b) Conduct

(c) Performance

(d) All of the above

Correct Answer 11 Rs. 196

Answer Price Earnings Ratio (PE) = Stock Market Price / EPS
Explanation So Stock Market Price = PE X EPS
= 7 X 28
= Rs. 196

Correct Answer 12 Conduct

Answer Analysing each industry properly as each industry has its peculiar behaviour,
Explanation is a part of Conduct Analysis of SCP analysis.
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 13 Which of these data is not easily available for research ?

(a) Historical data

(b) Financial data

(c) Management views on opportunities and challenges

(d) Business model

Question 14 NPAs of banks are typically low when interest rates are high - State True
or False ?

(a) TRUE

(b) FALSE

Correct Answer 13 Management views on opportunities and challenges

Answer Correct and detailed management views can be obtained only through
Explanation personal interactions. These views are generally not available elsewhere.

Correct Answer 14 FALSE

Answer NPAs are typically low when interest rates are low as defaults become less
Explanation due to affordability of Equated Monthly Instalments (EMIs).
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 15 Business Risk is an Unsystematic Risk - State True or False ?

(a) TRUE

(b) FALSE

Question 16 Industry rivalry will be high when similar products/services are being
offered by participants with little or no differentiation - State True or
False ?

(a) TRUE

(b) FALSE

Correct Answer 15 TRUE

Answer Unsystematic risk is the risk specific to individual securities or a small class
Explanation of investments. Hence it can be diversified away by including other assets in
the portfolio.
Business risk is the risk inherent in the operations of a company. It is also
known as operating risk, because this risk is caused by factors that affect the
operations of the company. This risk can be minimised by the investor by
including various other companies in the portfolio ie, diversifying. So if one
company faces a business risk and results into losses, other companies in the
portfolio makeup for it.

Correct Answer 16 TRUE

 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 17 A research analyst has prepared a research report on a company listed

on the NSE. He too wishes to buy this stock. Can he buy this stock and if
Yes, when ?

(a) Yes, he can buy this stock but after 15 days from preparation of such report.

(b) Yes, he can buy this stock but after 20 days from preparation of such report.

(c) Yes, he can buy this stock but after 30 days from preparation of such report.

(d) No, he cannot trade in this stock

Question 18 The Debt to Equity Ratio of a company is 2 : 1. The total size of its
Balance Sheet is Rs 27,00,000. Calculate the Debt of the company.

(a) Rs 600000

(b) Rs 900000

(c) Rs 1800000

(d) Rs 2700000

Correct Answer 17 Yes, he can buy this stock but after 30 days from preparation of such report.

Correct Answer 18 Rs 1800000

Answer Size of a Balance Sheet includes Equity + Debt.
Explanation Therefore Rs 27,00,000 includes Debts & Equity in the ratio 2 : 1
So 2700000 / 3 x 2 = 1800000 is the Debt component
2700000 / 3 x 1 = 900000 is the Equity component.
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 19 The formula for Weighted Average Cost of Capital :

WACC = [Ke * We] x [Kd * (1-Tx)*Wd] State True or False ?

(a) TRUE

(b) FALSE

Question 20 A company has sales of Rs 12400 and from this they have a operating
profit of Rs 2400. If the corporate tax is at 35%, calculate the net profit
margin of the company. ( There is no interest expense )

(a) 7.66%

(b) 10.87%

(c) 12.58%

(d) 14.70%

Correct Answer 19 FALSE

Answer WACC = [Ke * We] + [Kd * (1-Tx)*Wd]
Explanation Remember its 'addition'.

Correct Answer 20 12.58%

Answer Net Profit is the final profit ie. after Interest and tax.
Explanation In this question, to get Net Profit, we shall have to deduct the tax from
Operating Profit.
So 2400 less 35 % Tax (2400 - 840 ) = 1560 is the Net Profit
Net Profit margin is the Net profit as a % of Sales
Sales = Rs 12400
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 21 A Company has a PE ratio of 25. Calculate the PEG ratio if the potential
growth rate of the company is 20% for the next few years.

(a) 500

(b) 45

(c) 5

(d) 1.25

Question 22 Good knowledge of valuation techniques is sufficient to arrive at a fair

valuation on an asset - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 21 1.25

Answer Price to Earnings Ratio (PEG) = [Current price of stock/ EPS] / Growth rate
Explanation ie. PE / Growth Rate
= 25 / 20 = 1.25

Correct Answer 22 FALSE

Answer It requires the combination of knowledge, experience and professional
Explanation judgment in arriving at a fair valuation of any asset.
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 23 A business has a total assets of Rs 50,00,000 and the Earning Per Share is
Rs 0.50. The Net Income is Rs 1,80,000. The Price to Earning ratio is 18
and the Price to Book Value ratio is 1.25. Calculate the Asset to Equity
ratio.

(a) 1.3

(b) 1.93

(c) 2.56

(d) 5.8

Question 24 Return on Capital Employed can be calculated as ________ .

(a) EBIT / Total Capital Employed (Where Capital Employed = Networth -

Debt)

(b) EBIT / Total Capital Employed (Where Capital Employed = Networth +

Debt )

(c) EBIT x Total Capital Employed ( Where Capital Employed = Networth -

Debt )

(d) EBIT x Total Capital Employed ( Where Capital Employed = Networth +

Debt )

Correct Answer 23 1.93

Answer First we calculate the number of Shares.
Explanation EPS = Income / No. of Shares
0.50 = 180000 / No. of Shares
So No. of Shares = 360000
Now we calculate the Market Price of a Share
PE = Market Price / EPS
Market Price = PE X EPS
= 18 x 0.50 = 9
Book Value = Price / Price to Book Ratio
= 9 / 1.25 = 7.2
Equity (Networth) = Book Value x No. of Shares
= 7.2 x 360000 = 2592000
Asset to Equity Ratio = Asset / Equity
= 50,00,000 / 2592000
= 1.93

Correct Answer 24 EBIT / Total Capital Employed ( Where Capital Employed = Networth +
Debt )
Answer ROCE = Earnings Before Interest & Tax / Capital Employed
Explanation Capital Employed = Total Assets – Current Liabilities or Total Equity + Total
Debt
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Question 25 In Technical Analysis, a ________ level is level where the price tends to
find some hold as it is going down.

(a) Support

(b) Resistance

(c) Weekly low

(d) Weekly high

Correct Answer 25 Support

Answer A Support Level is the level where the price tends to find support as it is
Explanation going down. This means the price is more likely to go up from this level
rather than break through it.
 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6

Practice Question Banks also available for :

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NISM Series VII: Equity Derivatives Certification Exam
NISM Series III A: Securities Intermediaries Compliance Certification Exam
NISM Series X A : Investment Adviser (Level 1) Certification Exam
NISM Series X B: Investment Adviser (Level 2) Certification Exam
NISM Series X V: Research Analyst Certification Exam

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NCFM Financial Markets: A Beginners Module

NCFM Capital Market (Dealers) Module
NSE FIMMDA : Debt Market (Basic) Module
NCFM Derivative Market (Dealers) Module

BSE

Certificate on Security Market (BCSM)

 NISM SERIES XV – RESEARCH ANALYST
CERTIFICATION EXAM – PRACTICE TEST 6