Portfolio Management and SAPM Book Tybms and Tybfm

1
INDEX
Sr. No. Topic Page No.
1 Risk and Return 2–8
2 Time Value of Money 9 – 13
3 Financial Statement Analysis 14 – 17
4 Portfolio Theory 18 – 19
5 Capital Asset Pricing Model 20
6 Analysis and Valuation of Debentures 21
7 Valuation of Equity 22 – 27
8 Fundamental Analysis 28 – 36
9 Portfolio Management Framework 37 – 40
Chapter 1 - Risk and Return
M.P.Tutorials 9820869613
2
1. Ramesh recently forecasted four economic situations which he belives are likely to occur with the
given probablities. Based on this situation an analyst made the following forecasts of the returns of
stock A, B, andC.
Situation Probablity Conditional Returns %

A B C
High Growth 0.20 -13 -4 -9
Low Growth 0.15 16 -2 8
Stagnation 0.40 32 21 16
Recession 0.25 12 20 20
Calculate the mean return and standard deviation of stocks A, B and C and advise which stock is good for
investment.
2. Following is data relating the five securities.
Security A B C D E
Return (%) 8 8 12 4 9
Risk (S.D.) (%) 4 5 12 4 5
(i) Which securities should be selected for investment?
(ii) Assuming perfect correlation, analyse whether it is preferable for invest 75% in security A and 25% in
security C.
3. Given below are the likely returns in the case of shares of VCC Ltd. and LCC Ltd. in the various
economic conditions. Both the shares are quoted at Rs. 100 per share.
Economic Conditions Probablity Returns of VCC Ltd. Returns of LCC Ltd.

High Growth 0.3 100 150
Low Growth 0.4 110 130
Stagnation 0.2 120 90
Recession 0.1 140 60
(1) Which of the two companies are risky investments?
(2) Mr. Suresh has three options for investing Rs. 1000.
(i) Only in shares of VCC Ltd.
(ii) Only in shares of LCC Ltd.
Which of the above options is the best? Why?
4. Calculate the return in the following example:
3
A Ltd. (Rs) B Ltd. (Rs.)

Price as on 31-3-2005 20 10
Price as on 31-3-2006 15 15
Dividend for the year 1 1
5. In January 2001, Mr. Bhandri purchased the following 5 scrips
Co.’s Name No. of shares Purchase price

H Ltd. 100 250
C Ltd. 100 180
S Ltd. 100 80
F Ltd. 100 240
M Ltd. 100 260
He paid a Brokage of Rs. 1,500
During the year 2001, Mr. Bhandari received the following:
Co.’s Name Dividend Bonus Shares

H Ltd. 300 1:2
C Ltd. 290
S Ltd. 450
F Ltd. 500
M Ltd. 600
In January 2002, Mr. Bhandari sold all his holdings at the following prices.
Co.’s Name Market Price

H Ltd. 275
C Ltd. 240
S Ltd. 108
F Ltd. 200
M Ltd. 400
He paid the brokerage of Rs. 1,865.
Calculate the holding period return.
6. Investor’s assessment of return on a share of X Ltd. under three different situations is as follows:
Situation Change (P) Return (%)

1 0.25 36
2 0.50 26
3 0.25 12
Calculate the expected rate of return.
7. Mr. Ashok purchased 10 shares of ACC Ltd. four years ago at Rs. 50 each. The company paid the
following dividends.
4
Year 1 Year 2 Year 3 Year 4

Dividend per shares (Rs.) 2 2 2.5 3
Dividend Amount (Rs.) 20 20 25 30
The current price of the share is Rs. 60. What rate of return has he earned on his investment if he sells
the shares now ?
8. The probablity distribution of annual returns on the security are given below:
Return on Security Probablity

-0.35 0.04
-0.25 0.08
-0.15 0.14
-0.05 0.17
0.05 0.26
0.15 0.18
0.25 0.09
0.35 0.04
Compute the expected return on the security.
9. Calculate the expected rate of return from the following information relating to B Ltd.
State of Economy Probablity of Occurance Rate of Return

Boom 0.30 40%
Normal 0.50 30%
Recession 0.20 20%
10. An investor would like to find the expected return on the share of Golden Ltd. The following data
have been available:
State of the Economy Probablity of occurence Rate of Return

Boom 0.30 30
Normal 0.50 18
Recession 0.20 10
11. Mr. Abraham has a portfolio of the five stocks. The expected return and amount invested in each
stock is given below:
Stocks Expected Amount invested

A 0.14 10,000
B 0.08 20,000
C 0.15 30,000
D 0.09 15,000
E 0.12 25,000
Portfolio value 1,00,000
Compute the expected return on Mr. Abraham’s portfolio.
5
12. The rate of return on stocks of X and Y under different states of the economy are presented below
alongwith the probablity of the occurrence of each state of economy.
Particulars Boom Normal Recession

Probility of occurance 0.3 0.5 0.2
Rate of Return on stock X (%) 25 35 45
Rate of Return on stock Y (%) 45 35 25
(i) Calculate the expected rate of return and standard deviationof return on stocks X and Y.
(ii) If you could invest in either stock X or Stock Y, but not in both, which stock would you prefer?
13. The rate of return of stocks of A and B under different states of economy are presented below along
with the probablity of occurance of each stste of the economy.
Boom Normal Recession

Probablity of Occurance 0.3 0.4 0.3
Rate of Return on stock A (%) 20.0 30.0 50.0
Rate of Return on stock B (%) 50.0 30.0 20.0
(a) Calculate the expected rate of return and standard deviation of return for stocks A and for stocks B.
(b) If you could invest in either stocks A or stocks B, but not in both, which stock would you prefer and
why?
(c) If the rate of return on stocks A was revised as shown below, would your preference in question (b)
above change? Why?

Rate of Return on A (%) 50.0 40.0 30.0
14. The rates of return on stocks X and Y under different states of economy are presented below along
with the probablity of occurance of each stste of the economy:

Probablity of Occurance 4 3 3
Rate of Return on stock X 40 30 20
Rate of Return on stock Y 30 25 15
(i) Calculate the expected rate of return and standard deviation of return of stocks X and Y
(ii) If you could invest in either stocks X or stocks Y, but not in both, which stock would you prefer and
why?
15. Mr. A has invested equal amount in Security X and Security Y. The expected return during the boom
and depression with equal probablity of occurance as under:
6
Economic Condition Expected Returns of

Security X Security Y
Boom 6 12
Depression 15 5
Calculate the expected return and standard deviation of each security.
16. The rate of return on Stocks X and Y under different states of economy are given below:

Probablity of Occurance 0.35 0.50 0.15
Rate of Return on stock X 20 30 40
Rate of Return on stock Y 40 30 20
(i) Calculate the expected return and standard deviation of return on both the stocks.
(ii) If you could invest in either stocks X or stocks Y, but not in both, which stock would you prefer and
why?
(iii) What would be your decision if the probablity changes to 30:40:30?
17. Dr. Shah purchased 400 shares of sunder Ltd. @ Rs. 61 each on 15th October, 2004. He paid
brokerage of Rs. 600. The company paid the following dividends
June, 2005 Rs. 800

June, 2006 Rs. 1000
June, 2007 Rs. 1,200
He sold all his holding for Rs. 34,500 (net) on 15th October, 2007 (1) What is the holding period Return?
(2) What is the annualized Return (3) Is Mr. Shah a good investor?
18. Shankar has been considering an investment in stock X or Y. He has estimated the following
probablity distribution of return of stock X and Y.
Return on Stock X Return on Stock Y Probablity

-10 05 10
0 10 25
10 15 40
20 20 20
30 25 05
Calculate the expected return and standard deviation of Stock X and Y and state which stock is worth
investing.
19. The following is the information of stock A and stock B under the possible states of nature:
State of nature Probablity Return ‘A’ Return ‘B’
7
1 0.10 5% 0%
2 0.30 10% 8%
3 0.50 15% 18%
4 0.10 20% 26%
(1) Calculate the expected return on A and B.
(2) Calculate the standard deviation of stock A and B.
(3) If you want to invest in any one stock, which stock would you prefer?
20. Following is the information about the shares of ABC Ltd. And XYZ Ltd, under different economic
conditions. At present both shares are traded at Rs. 100.
Economic Condition Probility Expected price of Share Expected price of Share

ABC Ltd. XYZ Ltd.
High Growth 0.3 140/- 150/-
Low Growth 0.4 110/- 100/-
Stagnation 0.2 120/- 120/-
Recession 0.1 100/- 80/-
(i) Which company has more risk to invest?
(ii) Mr. Ram wants to invest Rs. 10000
(1) Only in ABC Ltd.
(2) Only in XYZ Ltd.
Which is the better option? Justify.
(iii) Will your decision change if the probablities are 0.4, 0.4, 0.1, 0.1 respectively?
21. The following is the information of stock X and stock Y under the possible states of nature:
State of Nature Probablity Return on X Return on Y

Boom 0.10 5% 0%
Normal 0.30 10% 8%
Recession 0.50 15% 18%
Recovery 0.10 20% 26%
You are required to:
(i) Calculate the expected return on stock X and Y.
(ii) Calculate the Standard Deviation of both the stocks and
(iii) If you want to invest in any one Stock, which stock would you prefer?
22. Mr. Rajesh a Fund Manager produced the following returns for the last five years. Rates of return on
Sensex are also given for comparision:
8
2003-04 2004-05 2005-06 2006-07 2007-08

Mr. Rajesh 6% 48% -15% 7% 11%
Sensex 12% 40% -6% 20% 3%
Calculate the average return and standard deviation of Mr. Rajesh’s Mutual Fund. Did he do better or
worse than sensex by these measures?
23. Compute the expected return of an investment in the following security.
Economic Condition Probablity (P) Return on Investment (%)

Boom 0.275 +40%
Stagnation 0.450 +20%
Depression 0.275 -10%
24. Ashok purchased 100 shares of A Ltd. four years ago at Rs. 500 each. The rate of brokerage was 1%.
The company paid the following dividends
Year 1 Year 2 Year 3 Year 4

Dividend per share (Rs.) 2 2 2.50 3
Dividend amount 200 200 250 300
The current price of share is Rs. 600. What is the profit has be earned on his investment if he sells the
share now?
Chapter 2 – The Time Value of Money
9
1. Mukesh has invested Rs. 10,000 in Bank Certificate of Deposit for 2 years, at 8 percent interest. How
much will he receive at maturity?
2. Shashikant deposits Rs. 1, 00,000 with a bank which pays 10 percent interest compounded annually,
for a period of 3 years. How much amount would he get at maturity?
3. Calculate the present value of annuity of Rs. 5,000 received annually for four years, when discounting
factor is 10%.
4. Find out the present annuity of Rs. 30,000 over three years at 10% discount.
5. CSV deposits Rs. 10,000 with a bank at 12% interest compounded quarterly. How much amount he
will get after a period of 6 years?
6. A bank promises to give you Rs. 10,000 after three years at the rate of 10% interest. How much
should you deposit today?
7. If the interest rate is 10%, what are the doubling pperiods of an investmentat this rate?
8. Four equal financial payments of Rs. 5,000 are made into a deposit account that pays 8 percent
interest per year. What is the future value of this annuity at the end of 4 years?
9. A bank advertises that it will pay a lumpsum of Rs. 45,740 at the end of eight years to the investors
who deposit annually Rs. 4,000 for 8 years. What is the interest the bank is paying?
10. Find the present value of Rs. 10,000 receivable 6 years hence if the rate of interest id 10 percent.
11. Find the present value of Rs. 50,000 to be received at the end of four years at 12 percent interest
compunded quaterly.
12. Find the present value of the following cash flow streams. The discount rate is 10 per cent
Year Cash Stream

1 Rs. 1000
2 Rs.4000
3 Rs. 4000
4 Rs. 4000
5 Rs. 3000
13. Mr. Shah has invested Rs. 50,000 on Xerox Machine on 1st Jan, 2002. He estimates net cash income
from Xerox Machine in next five years as under.
10
Year Estimated Inflows

2002 12,000
2003 15,000
2004 18,000
2005 25,000
2006 30.000
At the end of 5th year Machine will be sold at Scrap value of Rs. 5,000. Advice him whether his project is
viable, considering the interest rate 10% p.a.
14. What is the present value of a 4 year annuity of Rs. 8,000 at 12% interest?
15. A 10 payment annuity of Rs. 6,000 will begin 7 years hence. (The first payment occurs at the end of
7th year). What is the present value of this Annuity if the discount rate is 14 per cent?
16. A bank offers you to lend you Rs. 1, 00,000 if you sign a note to repay Rs. 1, 61,050 at the end of five
years. What rate of interest are you paying?
17. Find the effective annual rate if the nominal rate is 6% compunded semianually.
18. A is due to receive Rs. 10,000 at the end of five years. Since is in the need of money immediately, he
wants to sell his interest to B. B wants a return of 10 per cent per annum on his investment. How much
should he pay to A?
19. Krishnamurty has inherited Rs. 1,000 a year for the next 20 years. First payment being made in one
year’s time. However, he is in a need of money immediately and would like to sell his income to any
buyer who would pay him the right price. Assume that the current market rate of interest is 9%.
(a) What should be the right price he should accept?
(b) How much of his income must he sell if he wants only Rs. 2,500 present?
(c) If you were interested in buying the income but, if you had only 5,000 to invest what would be your
proposal?
20. You can save 20,000 a year for 5 years and Rs. 3,000 a year thereafter for 10 years. What would
these savings cumulate to at the end of 15 years if the rate of interest is 10%?
21. An investment of Rs. 40,000 made on 01/04/02provides inflows as follows:
Date Alternative I Alternative II

01/04/03 20,000 10,000
01/04/04 10,000 20,000
01/04/05 10,000 10,000
01/04/06 10,000 10,000
Which alternative would you prefer if the investor’s expected return is 10%?Give reason(s) for your
preference.
11
22. Find the value of the following cash flow if the discount rate is 10%.
Year Cash Flow

1 5,000
2 4,000
3 5,000
4 7,500
5 2,500
State whether the investment is worthwhile if the amount of cash outflow presently is Rs.15,000.
23. If Ms. Trinity saves Rs. 20,000 a year for 5 years and Rs. 3,000 thereafter for 10 years, what will be
the savings that will cumulate at the end of 15 yearsif the rate of interest is 15 %?
24. The share of Ridhi Ltd. (Rs.10) was quoting Rs.102 on 01.04.2002 and the price rose to Rs. 132 on
01.04.2005. Dividends were received at 10% on 30th June each year. Cost of funds was 10%. Is it a
worthwhile investment considering the time value of money? (Present value factor at 10% were 0.090,
0.826 and 0.751)
25. XYZ and Co. is considering investimg in a project requiring a capital outlay of Rs. 2,00,000.Forecast
for annual income after tax is as follows:
Year 1 2 3 4 5
Profit After Tax (Rs.) 1,00,000 1,00,000 80,000 80,000 40,000
Depression is 20% on Straight Line Basis
Evaluate the project on the basis of Net Present Value taking 14% discounting factor and advise whether
XYZ and Co. should invest in the project or not? The Present Value of Re.1 at 14% discounting rate are
0.8772, 0.7695, 0.5921 and 0.5194.
26. Miss Sonali is considering an investment opportunity which will give her cash inflows of Rs. 1,000, Rs.
1,500, Rs. 1,200, Rs. 1,100 & Rs. 400 respectively at the end of each of the next 5 years. The initial
investment is Rs. 4,000. If the time preference rate is 10%, state whether the investment is profitable or
not. (Present value factor at 10% are 0.9091, 0.8264, 0.7513, 0.6830, 0.6830, 0.6209).
27. A finance company has offered a scheme of investment where a person investing Rs. 40,000.
Presently is entitled to returns of Rs. 8,000, Rs. 9,000, Rs. 10,000, Rs. 11,000 and Rs. 12,000 in the next
five years. The indicated rate of interest is 10% p.a. Advise whether the investment is profitable. (PVIF
10%, 4 = 0.6830 and PVIF 10%, 5 = 0.6209).
28. Find out the present value of debenture from the following:
Face value of debenture Rs. 1,000
12
Annual Interest Rate 15%
Expected Return 12%
Maturity Period 5 years
(Present values of Re. 1 at 12% are, 0.8929, 0.7972, 0.7118, 0.6355 and 0.5674)
29. Umesh can save Rs. 20,000 a year for five years and Rs. 3,000 a year for 10 years thereafter. What
will be these savings accumulate at the end of 15 years if the rate of interest is 10 per cent. (FVIFA @ 10
% for 5 years = 6.1051 and FVIFA @ 10% for 10 years = 15.937)
30. Mr. Vishwanathan is planning to buy a machine which would generate cash flow as follows:
Year 0 1 2 3 4
Cash Flow (25000) 6000 8000 15000 8000
If discount rate is 10%, is it worth to invest in machine?
Year 1 2 3 4
Discount Factor 0.909 0.826 0.751 0.683
31. A machine costs for Rs. 2,80,000 and is expected to generate cach flows as follows:
Year 1 2 3 4 5 6 7
Cash Flow (Rs.) 50000 57000 35000 60000 40000 30000 60000
If the cost of capital is 12 per cent is it worth buying the machine?
32. An investment of Rs. 40,000 made on 1-4-2010 provides inflows as follows:
Year Alternative I Alternative II Discount Factor

1 20,000 10,000 0.9091
2 10,000 20,000 0.8264
3 10,000 10,000 0.7513
4 10,000 10,000 0.6830
Which alternative would you prefer?
33. Find the present value of the following cash flow and also state whether the investment is
worthwhile if the amount of cash outflow presently is Rs. 30,000.
13
Year Cash Flow Discount Factor

1 Rs. 10,000 0.9091
2 Rs. 8,000 0.8264
3 Rs. 10,000 0.7513
4 Rs. 15,000 0.6830
5 Rs. 5,000 0.6209
34. Find the present value of the following cash flow and also state whether the investment is
worthwhile if the amount of cash outflow presently is Rs. 60,000.
Year Cash Flow Discount Factor

1 Rs. 20,000 0.9091
2 Rs. 16,000 0.8264
3 Rs. 20,000 0.7513
4 Rs. 30,000 0.6830
5 Rs. 10,000 0.6209
Chapter 3 – Financial Statement Analysis
14
1. Following is the Balance Sheet of ‘P’ Ltd. as on 31st March, 2005 together with the profit and loss
account
Balance Sheet as on 31-3-2005
Liabilities Rs. Assests Rs.

Equity Share Capital 5,00,000 Plant and Machinery 4,00,000
General Reserve 1,80,000 Land and Buildings 3,20,000
Profit & Loss A/c 1,90,000 Patents 30,000
6% Debentures 2,50,000 Investements (Trade) 2,00,000
Bank overdraft 1,50,000 Cash at Bank 88,000
Creditors 2,90,000 Stock:
Unpaid dividend 10,000 Materials 90,000
Proposed Dividend 60,000 Finished Goods 1,60,000
Provision for taxation 1,20,000 Work inProgress 60,000 3,10,000
Debtors 2,22,000
Bills Receivable 30,000
Advances 1,20,000
Preliminary expenses 30,000
17,50,000 17,50,000
Profit & Loss account for the year ended 31-3-2005
Particulars Rs. Particulars

To Stock: By Sales 20,00,000
Materials 90,000 By Stock:
Finished goods 1,20,000 Materials 90,000
Work in progress 40,000 2,50,000 Finished goods 1,60,000
To Purchase of Materials 2,50,000 Work in Progress 60,000 3,10,000
To Wages 8,50,000 By Dividend on Inv. 30,000
To Power 2,80,000 By Sales of Scrap 18,000
To Factory expeses 40,000
To Office salaries 1,10,000
To Misc. Expenses 90,00080,000
To Selling and Distri. exp. 1,20,000
To Advertisements 80,000
To Preliminary Expenses 5,000
To Debenture Interest 15,000
To Depreciation:
Plant 60,000
Building 12,000 72,000
To Provision for taxation 1,70,000
To Proposed Dividend 70,000
To Balance of Profit 1,36,000
23,58,000 23,58,000
You are required to present the information suitably summerized in vertical form.
15
2. From the following profit and loss account and balance sheet of Sunder Ltd. for the year ended 31st
December, 2003 and 2004, you are required to make a comparitive analysis of its financial statements:
Profit &Loss Account
Particulars 2003 2004 Particulars 2003 2004

To Cost of Goods 6,00,000 7,50,000 By Net Sales 8,00,000 10,00,000
To Operating exp.
Administrative 20,000 20,000
Selling and Distn. 30,000 40,000
To Net Profit 1,50,000 1,90,000
8,00,000 10,00,000 8,00,000 10,00,000
Balance Sheet
Liabilities 31-12-03 31-12-04 Assests 31-12-03 31-12-04

Bills Payable 50,000 75,000 Cash 1,00,000 1,40,000
Creditors 1,50,000 2,00,000 Debtors 2,00,000 3,00,000
Tax Payable 1,00,000 1,50,000 Stock 2,00,000 3,00,000
6% Debentures 1,00,000 1,50,000 Land 1,00,000 1,00,000
6% Pref. Capital 3,00,000 3,00,000 Building 3,00,000 2,70,000
Equity Capital 4,00,000 4,00,000 Machinery 3,00,000 2,70,000
Reserves 2,00,000 2,45,000 Furniture 1,00,000 1,40,000
13,00,000 15,20,000 13,00,000 15,20,000
3. The following is the relating to Nelco Ltd. for the year 2001, 2002 and 2003. (All Rs. in Lakhs)
Particulars 2001 2002 2003

Sales 60 63 65.50
Cost of goods sold 54 56 58.00
Profit 6 7 7.50
Capital 40 44 45
Calculate: (i) Return on sales (ii) Capital turnover (iii) Return on investment.
4. The profit and loss account and the balance sheet of TTK Ltd. are given below:
Profit and Loss account for the year ended 31-3-2005
Particulars Rs. Particulars Rs.

To Cost of goods sold 3,00,000 By Sales 5,00,000
To Interest on Debentures 10,000 By Income from invest 10,000
To Provision for Taxation 1,00,000
To Net Profit 1,00,000
5,10,000 5,10,000
16
Balance Sheet as on 31-3-2005

Share capital: Fixed Assests 4,50,000
10% Preference Capital 1,00,000 Current Assests 1,50,000
Equity Capital 2,00,000 Investments 1,00,000
Reserves 1,00,000
10% Debentures 1,00,000
P & L A/c 1,00,000
Provision for tax 1,00,000
7,00,000 7,00,000
You are required to calculate (a) ROI based on total profit to total assests and (b) ROI based on profit to
net worth.
5. The following information about ‘S’ Ltd, is supplied to you for thwe year ended 31 st March 2005:
Share Capital:
10% of Preference Shares of Rs. 20 each Rs. 6,00,000
Equity Shares of Rs. 10 each Rs. 16,00,000
Rs. 22,00,000
Profit After Tax Rs. 5,40,000
Depreciation Rs. 1,20,000
Equity Dividend Paid 20%
Market Price of Equity Share Rs. 80
You are required to compute the following (i) Dividend Yeild Ratio (ii) Earning per share
(iii) Price Earning Ratio.
The Price Earning Ratio of Market Index is 15 times, would you advise your client to invest in this share?
6. The balance sheet of two Companies is given below:
A Ltd. B Ltd.
(Rs. in Lakhs) (Rs. in Lakhs)
Share Capital 10 15
12% Debentures 5 10
Reserves and Surplus 9 5
Creditors 6 10
Total Liability 30 40
Machinery 15 20
Debtors 3 7
Stock 10 10
Cash and Bank 2 3
Total Assests 30 40
Sales 60 80
Cost of Goods Sold 40 55
Other Operating Expenses 5 8
Interest Expenses 0.5 1
17
Income Tax 0.5 1

Dividend 1 3
Answer each of the following questions by making a comparisions of ratios:
(i) Which company is holding shareholder’s money more profitably?
(ii) Which company is better able to meet its current debts?
(iii) Which company collects its receivables faster assumig all sales are on credit basis?
(iv) Which company retains the larger proportion of income in the business?
(v) If you want to buy shares of any one company which company’s share would you buy?
18
Chapter 4 – Portfolio Theory
1. Following Securities are held by an investor in his portfolio:
Security X Security Y
Expected Return 15 20
Expected variance 9 16
Co varience XY = +8
What is the risk of combining these securities?
2. From the following information calculate the Beta of the security:
Year Return on Security % Return on market portfolio %

1 10 12
2 12 11
3 15 14
4 10 12
5 08 11
3. Calculate the beta β in case of share of Nelco Ltd., whose returns and market portfolio returns are
given below:
Year Nelco Ltd. Market Portfolio Returns

1 20 14
2 24 18
3 10 9
4 15 14
5 (-) 10 (-) 8
6 12 10
7 18 16
8 28 30
9 33 35
10 40 42
4. From the following data calculate the Beta of a security.
Year Return on Security (%) Return on Market Portfolio (%)

1 10 12
2 12 10
3 13 10
4 10 12
5 8 15
6 11 14
7 16 20
19
8 12 15
9 18 20
10 20 22
5. Compute the beta factors and expected returns for Keshav Ltd. and Madhav Ltd. Return on
government securities is 9%. Returns in earlier years are -
Year Keshav Ltd. Madhav Ltd. Market

1 20% 16% 14%
2 22% 18% 16%
3 20% 20% 18%
4 18% 18% 12%
6. Mr. Krishna has invested equal amount on security X and security Y.
Expected Return Security X Security Y

In Prosperity 5 13
In Depression 14 6
The probablity of prosperity and depression is 0.5 each. You are required to calculate expected return
and standard deviation of securities as well as portfolios.
7. The details of securities in a portfolio are as follows:
Expected Return of Stock A 20% Risk (σ) of Security A 16%

Expected Return of Stock B 30% Risk (σ) of Security B 10%
Coefficient of corelation between A and B in these situations are -1, 0.5 and 1. Investment in A is 40%
and In B is 60%.
Calculate (i) Return on Portfolio, (ii) Risk on Portfolio, (iii) under which situation diversification can give
an advantage.
8. Mr. Bharat has invested in XYZ Ltd. and in ABC Ltd. in the proportion of 40% and 60%. The returns
from these companies are given below:
Year XYZ Ltd. ABC Ltd.

1 20 24
2 30 36
Standard deviation of both the companies is 3. Calculate:
(i) Expected returns of Bharat’s portfolio. (ii) Covarience between XYZ Ltd. and ABC Ltd. (iii) Portfolio
Risk of Bharat.
20
Chapter 5 – Capital Assest Pricing Model (CAPM)
1. Calculate the value from the following information:
Year Return on Security Return on Market Portfolio

1 10 12
2 12 10
3 13 10
4 10 12
5 8 15
6 11 14
7 16 20
8 12 15
9 18 20
10 20 22
2. There are two securities A and B. Security ‘A’ is less risky and has a beta of 0.89 and security ‘B’ is
more risky and has a beta of 1.4. The risk free return is 10% and the market rate of return is 12%.
Calculate the following:
(a) Risk Premiumof Market.
(b) Expected Return of Security ‘A’.
(c) Expected Return of Security ‘B’.
3. Returns on X Ltd. were 12%, 13%, 12% and 11% in the last four years. Returns on Y Ltd. were 12%,
13%, 9% and 10% in the last four years. While the average market returns were 14%, 15%, 14% and 13%
in the last four years, return on Government securities was 6.5%.
You are required to compute beta factors and expected returns for X Ltd. and Y Ltd. (using CAPM) and
offer your comments.
4.
Investment in Equity Shares Initial Dividend/ Interest Market Price (end Beta Risk Factor
Price of the year)
ACC Limited 25 2 50 0.8
Tata Steel Limited 35 2 60 0.7
UB Limited 45 2 135 0.5
Indian Railway Bonds 1000 140 1005 0.99
Risk Free Return may be taken at 14%.You are required to calculate:
(1) Expected Rate of Return of portfolio in each usin CAPM (Capital Assest Price Model).
(2) Average Return of Portfolio.
21
Chapter 6 – Analysis and Valuation of Debentures
1. A debenture of Rs. 100 face value carries an interest rate of 14 per cent is redeemable after 6 years at
a premium of 2 per cent. If the required rate of return is 16 per cent , what is the present value of
debenture?
2. What is the value of a bond of Rs. 10,000 with a 7% coupon rate, 5 years before maturity? The
required rate of return is 8%.
3. A Bond of Rs. 10,000 value with a coupon of 7 per cent is redeemable after 5 years at a premium of 5
per cent. The required rate of return is 8%. The current market price of the bond is Rs. 940. Whether
invest at current market price of the bond is advisable? The present value of Re. 1 at 8% discounting rate
are 0.9259, 0.8573, 0.7938, 0.7350 and 0.6806.
4. A GOI bond of Rs. 1000 each has a coupon rate of 8 per cent per annum and maturity period of 20
years. If the current price is Rs. 1050, find YTM?
5. You are considering an investment in one of the following Bonds:
Coupon Rate Maturity Price/ Rs. 100 Par value

Bond A 12% 10 year Rs. 70
Bond B 10% 6 year Rs. 60
(i) What is the YTM of each bond?
(ii) Which bond would you recommend for investment?
6. A bond of Rs. 1,000 has a coupon Rate of 6 per cent per annum and a maturity period of 3 years.The
bond is currently selling at Rs. 900. What is the yeild to maturity in the investment of this Bond?
7. A bond of Rs. 1000 face value carrying an interest rate of Rs. 14 per cent is redeemable after 6 years
at a premium of 5 per cent if the required rate of return is 15% what is the present value of Bond?
8. Calculate the yield to maturity (YTM) of bond – I:
Annual Interest 12%

Face Value Rs. 100
Price of Bond Rs. 70
Maturity period 10 years
If bond II gives 20% YTM, wkich is better to invest?
9. A bond of Rs. 1,000 has a coupon Rate of 8 per cent per annum and a maturity period of 3 years.The
bond is currently selling at Rs. 910. What is the yeild to maturity in the investment of this Bond?
10. A Ltd. has issued bonds of the par value of Rs. 1000. The present value of the bond is Rs. 900. The
bond carries an interest rate of 14%. The maturity period is 6 years. You are required to calculate the
yeild on maturity.
22
Chapter 7 - Equity Valuation
1. The following is the summarised Balance Sheet of Amol Ltd., as on 31st March, 2005.
Liablities Rs. Assests

5% Preference Shares of 10,00,000 Fixed Assests 38,00,000
Rs. 100 each
Equity Shares of Rs. 10 20,00,000 Investments 10,00,000
each
General Reserve 15,00,000 Stock 5,97,000
Profit and Loss A/c 12,00,000 Debtors 13,78,000
6% Debentures 8,00,000 Cash in hand 25,000
Creditors 3,00,000 Cash at Bank 20,00,000
Other Liablities 2,00,000
70,00,000 70,00,000
For the purpose of valuation of shares, fixed assests are to be valued at Rs. 34, 20,000. Investments are
to be taken at Rs. 10, 80,000 and the debtors are bad to the extent of 5%. Interest on debentures is
accured due for 9 months and preferance dividend for 2004-05 is also due. Calculate the value of each
equity share.
2. An investor expects to receive the following cash flows from a share.
Year Cash Flow (Rs.)

1 20
2 30
3 50
Evaluate the value of the share if the discount rate is 10% and its current market price is Rs. 100.
3. Calculate the value of Rs. 10 face value on (i) yeild on capital employed basis and (ii) Dividend basis.
The market expectation is 12%
Year Capital Employed (Rs. Profit (Rs. Lakhs) Dividend (%)

Lakhs)
2001 5 0.80 12
2002 8 1.60 15
2003 10 2.20 18
2004 15 3.75 20
4. Z Ltd. is expected to pay cash dividend amounting to Rs. 8 per share into the indefinate future and has
a required rate of return is 12%. Determine the intrinsic value of a company’s share. State whether the
share is rightly priced if the current market price is Rs. 85.
5. C Ltd. paid dividend of Rs. 1.80 per share. The forecast is that the dividend will grow by 5% per year
into the infinite future. If the required rate of return is 11% and the current market price of the
company’s share is Rs. 40, Find out its intrinsic value.
23
6. M Ltd. paid a dividend of Rs. 0.75 per share. Over the next year it is expected to pay dividends of Rs. 2
per share. In the third year it is expected to pay dividend of Rs. 3 per share. The dividend will grow 10
per cent per year indefinitely. If the required rate of return is 15% and current market price is Rs. 55 find
the intrinsic value of the company’s share.
7. Z Ltd. is a zero-growth company paying dividend of Rs. 4 per share and selling for Rs.60 per share. The
required rate of return is 10%. Find the value of company’s share.
8. C Ltd. had paid dividend of Rs. 1.80 per share over the past year, with the forecast that dividend
would grow by 5% per year for over. Its required rate of return is 10% and the current market price is Rs.
40. If E0 is Rs. 2.70, evaluate the price of company’s share.
9. M Ltd. has a current market price of its share Rs. 50. The Earning per share is Rs. 3 and dividends over
the past year were Rs. 0.75 for the next two years, the earnings and dividends are forecasted with their
earnings growth rates and pay-out ratios:
D1 = Rs. 2, E1 = Rs. 5, ge¹ = 67%, P1 = 40%
D2 = Rs. 3, E2 = Rs. 6, ge² = 20%, P2 = 50%
Constant growth in dividends and earnings of 10% per year is forecast to being T = 2 which means:
D3 = Rs. 3.30, E3 = Rs. 6.60, g = 10%, P = 50%
Given the required rate of return of 12%, evaluate the equity share of the company.
10. B Ltd. has paid dividend per share of Rs. 10 in the previous year. Earnings and dividend are expected
to grow at a rate of 20 per cent. The required rate of return and current market price are 25% and
Rs. 280 respectively. Is the share fairly priced?
11. The after tax profits of Beta Ltd. are expected to be Rs. 18 crores. The company does not have any
preferance shares outstanding, whereas the equity capital is Rs. 90 crores dividend into shares Rs. 10
each. The company is operating in an industry whose P/E multiple is 10. Using P/E ratio model
determine the price at which the stock should be purchased.
12. BSES paid Rs. 2.50 as dividend per share on its equity shares on the last year. Dividends are expected
to grow at 10 per cent per year for an indefinite future. (a) What is its expected rate of return if its
current market price is Rs. 20? (b) If the required rate of return is 12%, What would be the value of
stock? (c) Is it worth investing in the share?
13. The dividends per share of Z Ltd. has been growing at an average annual compounded rate of 10%.
Its last dividend paid was Rs. 2 per share. Its growth rate will fall down to 4 per cent from the beginning
of the forth year. What would be the intrinsic value of company’s share if the required rate of return is
15%?
24
14. Mr. Amar holds an equity share giving him an annual dividend of Rs.20. He expected to sell the share
for Rs. 180 at the end of the year. Calculate the value of the share if the required rate of return is 12%.
15. Prof. Nimish wishes to invest in the shares of ‘A’ Ltd. whose expected dividend in the first year is Rs.
4. In the past the company’s dividend per share has grown at an average rate of about 5 per cent per
annum. Prof. Nimish expects that the dividend will grow at the same rate in future. The required rate of
return on the share is 25% per annum. The market price of share is Rs. 16. Advise Prof. Nimish whether
to buy the shares?
16. The following data pertain to the value of underlying factors of A Ltd’s shares.
Original Revised
Risk-free rate 10% 8%
Market Risk premium 5% 6%
Beta 1.2 1.5
Expected Growth Rate 6% 8%
Previous dividend Rs. 2 Rs. 2
(a) What is the intrinsic value of A Ltd’s shares based on the original set of values?
(b) What will it be under the revised set of values?
17. What will the intrinsic value of equity shares of ‘L’ Ltd. based on the following data:
Last Dividend Rs. 3 per share

Growth Rate for 1–3 years 20% p.a.
Growth Rate for 4-6 years 10% p.a.
Growth Rate beyond 6 years 5% p.a.
The investor’s required rate of return is 14%.
18. ‘B’ Ltd paid dividend at Rs. 10 per share. Earnings and dividends are expected to grow at a rate of 20
per cent. The required rate of return and the current market price is 25% and Rs. 240 respectively. Is the
share fairly priced?
19. The current EPS of ‘N’ Ltd. is Rs. 6, It’s dividend payout is 40%, and its growth rate of EPS is 10%. The
normal P/E mulatiple is 15:1. What is the intrinsic value of ‘N’ Ltd’s shares using capitalisation of
earnings method. What is its value in three years using the same method?
20. Sunrise Ltd. is currently paying dividends of Rs. 1.50 on its face value of Rs. 10. The earnings and
dividends are expected to grow at 5% annual rate indefinately. Investors require 9% rate of return on
their investments. The company is considering several business strategies and wishes to determine the
effects of these strategies on the market price of it’s share.
(a) Counting the present strategy will result in the expected growh rate and required rate of return as
above.
25
(b) Expanding sales will increase the expected dividend growth rate of 7% but will increase the risk of
the company. As a result, the investor’s rate of return will increase to 12%.
(c) Integrating into retail stores will increase the dividend growth rate to 6 per cent and increase the
required rate of return to 10 per cent.
You are required to find the best strategy with the point of view of the market.
21. ‘D’ Ltd. 10 lakhs equity shares outstanding at the beganing of the year 2002. The current market
price per share is Rs. 150. The Board of Directions of the company proposed declaring Rs. 8 per share as
dividend. The rate of capitalisation appropriate to the risk-class to which company blongs is 12%.
(a) Using Miler-Modigliam Approach, Calculate the market price per share of the company when the
proposed dividend is (i) declared and (ii) not declared.
(b) How many new shares are to be issued by the company at the end of the company accounting year
on the assumption that the net income for the year is Rs. 2 crores? Investment budjet is Rs. 4 crores and
(i) the above dividends are disturbed (ii) and they are not declared.
(c) State the market value of shares at the end of the year will remain the same whether dividends are
either disturbed or not declared.
22. ‘F’ Ltd. is foreseeing a growth rate of 12% per annum in the next 2 years. The growth rate is likely to
fall to 10% for the 3rd year and forth year. After that the growth rate is expected to stabilise at 8% per
annum. If the last dividend paid was Rs. 1.50 per share and the investor’s required rate of return is 16%,
find out the intrinsic value per share of ‘F’ Ltd., as of date. You may use the following.
Years 0 1 2 3 4 5
Discounting factor at 16% 1 0.86 0.74 0.64 0.55 0.48
23. As per the financial accounts for the last year, the company has paid the dividend @ 20%. Amount of
Paid up equity capital is Rs. 6, 00,000 and 10% preferance share capital Rs. 1, 00,000. Operating profit is
Rs. 4, 00,000. The tax rate is 40%. The company expects a growth rate of 3%. Compute value per equity
share using:
(a) Dividend Approach
(b) Dividend Growth Approach
(c) Earnings Approach
24. Samrudhi Ltd., paid Rs. 2.50 as dividend per share on its equity shares for the year ended 31 st March,
2005. Divdends are expected to grow at 10 per cent per annumfor an indefinite future. The current
market price of the share is Rs. 20.
(i) What is the expected rate of return?
26
(ii) If the reouired rate of return is 12%, what would be the value of stock?
(iii) Is it worth to invest in the share?
25.MNO Ltd. has quoted at Rs. 20 on BSE currently. The company pays Re. 1 per share asdivedends and
investors expects a growth rate of 5% per year. The required rate of return is 6%. Compute
(i) Expected rate of return.
(ii) If the anticipated growth rate is 6% p.a., calulate the indicative market price.
(iii) Advise on the basis of the indicative market price computed above whether it is profitable to invest
in the shares of MNO Ltd. at current price on BSE.
26. Meghna Ltd. paid dividend of Rs. 1.80 per share. The forecast is that dividend will grow 8 per cent
per annum into the indefinite future. If the required rate of the return is 10% and the current market
price of the company’s stock is Rs. 60, find out the intrinsic value of the company’s share. Is it worth
investing in the company?
27. A Ltd paid a dividend of Rs. 3 per share in the last year. The dividend is expected to grow at a
constant rate of 5 per cent in the future. If the required rate of return is 10%, what would be the
intrinsic value of that share?
28. A Ltd. paid a dividend @ 20% in the last year. The paid up Equity Capital of the Compay is Rs.
6,00,000 and preferance share capital of Rs. 1,00,000. Net Operating profit is Rs. 4,00,000. The tax rate
is 32%. The company expects a growth rate of 5%. Compute the value of Equity Share using:
(i) Dividend Approach
(ii) Dividend Growth Approach
(iii) Earnings Approach
29. Anand Ltd. paid a dividend of Rs. 1.80 per share in the last year. The forecast is that dividends will
grow by 5 per cent per year into indefinite future. If the required rate of return is 11% what would be
the intrinsic value of the share? If the market price of the share is Rs. 40, what is expected rate of return
on the stock? Should you make investment in the stock?
30. RIL paid Rs. 3/- as dividend per share on its equity shares for last year. It is expected that it will grow
at 10% per year for the indefinite future.
(i) What is its expected rate of return if current arket price is Rs. 15?
(ii) If required rate of return is 15%, then what would be the value of stock?
31. Bharat Ltd. paid Rs. 2.50 as dividend per share on its equity shares for the last year. Dividends are
expected to grow at 10 per cent per annum for an indefinite future. (i) What would be the value of stock
27
if the required rate of return is 15%? (ii) Is it worth investing in the share at the current market price of
Rs. 60?
32. Compute the market price from the following data:
Required rate of return = 20%

Growth rate = 10%
Dividend per share = Rs. 10
33. Transworld Textile’s Equity Shares currently sell for Rs. 32 per share. The company’s finance
manager anticipates a constamt growth of 10.5% and at the end of the year dividend of Rs. 2.50 per
share.
(i) What is its expected rate of return?
(ii) If the investor requires 17% return, should he purchase the stock?
28
Chapter 8 – Fundamental Analysis
1. The following information is taken from the records of two companies in the industry:
A Ltd. (Rs. Lakhs) A Ltd. (Rs. Lakhs)

Cash 2 3
Debtors 3 7
Stock 12 10
Plant Machinery 18 23
Total Assests 35 43
Sundry Creditors 9 10
12% Debentures 5 0
Equity capital 11 18
Reserves and surplus 10 5
Total Liablities 35 43
Sales 60 85
Cost of goods sold 40 65
Other Operating Expenses 8 10
Interest Expenses 0.60 1.20
Income Tax 0.40 3.80
Dividend 1.00 2.00
Answer the following questions by comparing one or more relevant ratios.
(a) Which company is holding shareholder’s money more profitably?
(b) Which company is better able to meet its current debts?
(c) If you want to purchase debentures of any one company which company’s debentures would you
buy?
(d) Which company collects its receivables faster assumig all sales are on credit basis?
(e) Which company retains the larger proportion of income in the business?
2. Shown below are the Comparative Balance Sheets and Operating Data of X Ltd. for the years ended
on 31st December 1992, 1993, 1994.
Comparative Balance Sheets
1992 Rs. 1993 Rs. 1994 Rs.

Current Assests
Cash 1200 1900 400
Debtors 14800 12400 10400
Stock 14800 16200 19800
(A) 30800 30500 30600
Fixed Assests (Net)
Equipments 9800 12000 12800
29
Buildings 15700 163000 18000

Land 5000 5000 5000
(B) 30500 33300 35800
Total Assests (A+B) 61300 63800 66400
Bills payable 7500 3000 5000
Creditors 6300 11200 13400
Accured Loans 1200 1600 29000
(A) 15000 15800 21300
Long Term Loans
10% Debentures (B) - - 5500
Owner’s Equity
Equity Capital 30000 30000 30000
Retained Earnings 16300 18000 9600
(C) 46300 48000 39600
Total Liabilities (A+B+C) 61300 63800 66400
( Note: 10% debentures were subscribed on 1st January, 1994)
Additional Information
1992 Rs. 1993 Rs. 1994 Rs.

Total Sales 100000 105000 93000
Net Profit after tax 5000 5700 2400
Dividend Paid 3000 3000 1000
You are required to :
(a) Compute the following for each of the years:
(i) Current Ratio (ii) Acid Test Ratio (iii) Proprieotory Ratio (iv) Return on Proproetor’s Equity
(b) Discuss the financial condition of the company as at 31.12.92 and the trends shown by the
comparitive data and the ratio.
Particulars Quick Ltd. Slow Ltd.

Equity share capital (Rs. 10 face value) 200 250
12% preferance shares 80 100
Profits after tax 50 70
Proposed dividend 35 40
Market price per share Rs. 100 Rs. 140
Calculate: (1) Earning per share (2) P/E ratio (3) Dividend pay-out ratio (4) Return on equity shares
As an Analyst inform the investor which of the two companies are worth investing.
30
4. The following are the Income Statements and Balance Sheets of two companies which are engaged in
the manufacture of Television Sets, Music Systems and such other items:
Income Statements for the year ended 31st December, 2002
Particulars GL Ltd. LPB Ltd.

Sales 11,500,000 16,000,000
Less: Cost of Goods sold 8,200,000 10,400,000
Gross Profit 3,300,000 5,600,000
Less: Other expenses 1,935,000 3,277,500
Net profit before Interest and Tax 1,365,000 2,372,500
Less: Interest 165,000 172,500
Net Profit before Tax 1,200,000 2,200,000
Less: Tax 400,000 720,000
Profit after tax 800,000 1,480,000
Dividend 480,000 1,110,000
Retained earnings 320,000 370,000
Balance Sheets as at 31st December, 2002
Particulars GL Ltd. LPB Ltd.

Paid up Equity Share Capital 10,00,000 20,00,000
Reserves 3,50,000 5,00,000
Long Term Loans 13,50,000 15,00,000
Total Funds Available 27,00,000 40,00,000
Fixed Assests 17,00,000 28,00,000
Working Capital 10,00,000 12,00,000
Total Funds Employed 27,00,000 40,00,000
Other Information:
(a) The Equity Share Capital of Gl Ltd. consisted of 1, 00,000 Equity Shares of Rs. 10 each. On 1 st January
2003, the company issued 10,000 Equity Shares of Rs. 10 each at apremium of Rs. 20 per share.
(b) The sales of GL Ltd. are expected to increase by 33% in the year 2003. The net profit margin ratio is
expected to be maintained at the existing level of 2002.
(c) The Equity Share Capital of LPB Ltd. consisted of 2, 00,000 Equity Shares of Rs. 10 each. The sales of
LPB Ltd. are expected to increase by 18% in the year 2003. The net profit margin ratio is expected to be
maintained at the existing level of 2002.
(d) The average market prices of the shares of the two companies during the year 2002 were as under:
GL Ltd. Rs. 160
LPB Ltd. Rs. 111
31
You are required to calculate the following and comment on the same, indicating, with reasons, which
company you recommend for investment:
(i) Return on Capital Employed (Closing).
(ii) Return on Equity.
(iii) Capital Gearing Ratio.
(iv) Capital Turnover Ratio.
(v) Net Profit Margin Ratio.
(vi) Dividend Yeild.
(vii) Price Earnings Ratio.
(viii) Projected Earnings Ratio.
(ix) Price Projections based on the projected performance for the year 2003. (rounded off to the nearest
rupee), assuming that the P/E Ratios of 2002 will remain uchanged in the year 2003.
(x) Rates of annualised returns (ignoring dividend) if the shares of GL Ltd., are bought @ Rs. 162 and
those of LPB Ltd. @ Rs. 133 on 1-4-2003 and sold on 31-12-2003 at their respective projected prices.
5. The following information is available for Swift Co. along with various ratios relevant to the particular
industry to which it belongs. Find out the relevant ratios of Swift Co. and give your comments on the
strenghts and weaknesses of Swift Co. by comparing its ratios with industry norms. As an investment
counsellor would you advise your clients to invest in the shares of the company, if the shares are
available at Rs. 4 per share?
Balance sheet as at 31-3-2000

Equity Share Capital 24,00,000 Net Fixed Assests 12,10,000
(Face value Rs. 10)
10% Debentures 4,60,000 Cash 4,40,000
Sundry Creditors 3,30,000 Sundry Debtors 5,50,000
Bills Payable 3,00,000 Stock 16,50,000
Other Current Liabilities 2,20,000
Reserves 1,40,000
38,50,000 38,50,000
32
Particulars Rs. Rs.

Sales 55,00,000
Less: Cost of goods sold
Material 20,90,000
Wages 13,20,000
Factory overhead 6,49,000
40,59,000
Gross Profit 14,41,000
Less: Selling and distribution cost 5,50,000
Administration cost 6,14,000
11,64,000
Earnings before Interest and Taxes 2,77,000
Less: Interest Charges 46,000
Earnings before Tax 2,31,000
Less: Taxes 1,15,000
Net Profit 1,15,000
Industry Norms
Ratoios Considered Norms

(i) Sales/Stocks 9.0
(ii) Sales/Total Assests 2.0
(iii) Net Profit/Sales 3.5%
(iv) Net Profits/Total Assests 7.0%
(v) Net Profit/Net Worth 10.5%
(vi) Total Debts/Total Assests 60.0%
(vii) Price/ Earnings Ratio 15
6. The Capital of ABC Ltd. consists of 9% Preferance Shares of Rs. 10 each, Rs. 3,00,000, Equity Shares of
Rs. 10 each, Rs. 10 each, rs. 8,00,000. The profit after tax is Rs. 2,70,000, Equity dividend is 20% and
market price of equity shares is Rs. 40. You are required to calculate the following ratios and comment
on them, (a) Dividend Yeild, (b) Preference and Equity Dividend Cover, (c) Earnings Per Share and (d)
Price Earnings Ratio.
7. Following information is available relating to Beena Ltd. and Meena Ltd:
Beena Ltd. Meena Ltd.

Equity Share Capital (Rs. 10) 200 250
12% Preferance Shares 80 100
Profit After Tax 50 70
Proposed Dividend 35 40
Market Price Per Share Rs. 25 Rs. 35
You are required to calculate: (i) Earning per share (ii) P/E Ratio. (iii) Dividend Payout Ratio. (iv) Return
on Equity Shares.
As an analyst, advise the investor which of the two companies is worth investing.
33
8. M/s Green a Blue Ltd. has presented its financial information for the year 2006 as follows:
Balance Sheet on 31st March, 2006
Share Capital 12,00,000 Fixed Assests 28,60,000
Reserves and Capital 8,00,000 Stock in Hand 19,80,000
Long Term Debt 22,70,000 S. Debtors 16,50,000
Current Liabilities 23,50,000 Cash and bank Balance 1,30,000
Total 66,20,000 Total 66,20,000
Income statement for the year ended 31st March, 2006
Amount Rs.
Net Sales 1,02,00,000
Cost of Goods Sold 79,20,000
Selling and Administrative Expenses 15,45,6000
Net Profit 7,34,400
(1) Tax Rate is 30% Company’s Capital is dividend in 1, 20,000 shares of Rs. 10 each.
(2) Company has declared dividend @ 25%
(3) Market price of share is Rs. 50.
You are required to evaluate investment in company on the basis of:
(i) Dividend Yield.
(ii) EPS.
(iii) P/E ratio.
(iv) ROCE.
34
9. Following is the information relating to A Ltd. and B Ltd.
Particulars A Ltd. (Rs. in Lakhs) B Ltd.
Equity Share Capital 200 250
10% Preferance Share Capital 80 100
15% Debentures 20 60
Profit before Interest and Taxes 60 80
Proposed Dividend 20 25
Provision For Taxes 17 21
Market Price per Share Rs. 50 Rs. 60
You are required to calculate: (i) EPS, (ii) P/E Ratio, (iii) Dividend Payout Ratio, (iv) Dividend yield and
message which company’s share is worth investing.
10. Veena Ltd. has presented its financial information for the year ended 31st March, 2007.
Earnings before interest and taxes Rs. 8,00,000
1,00,000 Equit shares of Rs. 10 each Rs. 10,00,000
10% Debentures Rs. 15,00,000
Reserve and surplus (before adjustsments) Rs. 5,00,000
Provision for taxation 30%
Proposed dividend 20%
Market price per share 32
Calculate: (i) EPS (ii) P/E Ratio (iii) Book value per share and (iv) Dividend yield and state whether
investment in Veena Ltd. is advisable.
35
11. Compute the following ratios and briefly comment on each of them:
(i) Dividend yield.
(ii) Preferance and equity cover.
(iii) EPS
(iv) P/E ratio
The capital of SRK Ltd. Consists of:
Rs.
10% Preferance Shares (Rs. 10/- each) 30, 00,000
Equity Shares (Rs. 10/- each) 10, 00,000
15% debenture 10, 00,000
Net profit before tax is Tax rate is 40% 8, 00,000
12. Triveni Industries Ltd. gives you the following information for the year ended 31st March, 2008:
Profit before invest and taxes Rs. 16,50,000

Tax rate 30%
Proposed Equity Dividend 25%
Capital Employed
10% Preferance Share Capital Rs. 15,00,000
80000 Equity Shares of Rs. 10 each Rs.8,00,000
15% Debentures of Rs. 100 each Rs. 7,00,000
Reserved and Surplus Rs. 12,00,000
Current Market Price per Equity Share Rs. 50
You are required to calculate:
(i) Earning Per Share.
(ii) Price Earning Ratio
(iii) Dividend Payout Ratio
(iv) Dividend Yield
(v) Book value per share and stste whether it is worth investing in the Equity Shares of the Company.
36
13. The following is the data relating to BIG Ltd. for the year 2008, 2009, 2010.
Particulars 2008 2009 2010

Sales 60 63 65.50
Cost of goods Sold 54 56 58.00
Profit 6 7 7.50
Capital 40 44 45
Calculate:
(i) Return on Sales
(ii) Capital Turnover
(iii) Return on Investment.
14. Following information is available relating to HA limited and AH Ltd.
Particulars HA Ltd. AH Ltd.

Equity Share Capital Rs. 200 lakhs Rs. 250 lakhs
12% Preferance Shares Rs. 80 lakhs Rs. 100 lakhs
Profit After Tax Rs. 50 lakhs Rs. 70 lakhs
Proposed Dividend Rs. 35 lakhs Rs. 40 Lakhs
Market price per Share Rs. 200 Rs. 280
Calculate: (i) Earning Per Share
(ii)P/E Ratio
(iii) Dividend Payout Ratio
(iv) Return on Equity Shares
37
Chapter 9 – Portfolio Management Framework
1. A portfolio has a market value of Rs. 40 lakhs at the beginning of the quarter and the market value of
Rs. 46 lakhs at the end of the quarter. What is the return on this portfolio for the quarter?
2. A portfolio has a market value of Rs. 100 lakhs at the beginning of the month. The client deposited Rs.
5 lakhs in the just before the end of the month with the portfolio manager. At the end of this month the
market value of portfolio was Rs. 103 lakhs. Find the return on this portfolio.
3. A portfolio has a market value of Rs. 100 lakhs at the beginning of the quarter and a deposit of Rs. 5
lakhs has been made in the middle of the quarter. The market value of the portfolio at the end of the
quarter was Rs 103 lakhs. What would be the return on the portfolio?
4. A portfolio had a market value of Rs. 100 lakhs at the beginning of the quarter. In the middle of the
quarter the portfolio had a market value of Rs. 96 lakhs, so that right after the deposit of Rs. 5 lakhs in
the middle of the quarter the market value was Rs. 101lakhs. At the end of the quarter the market value
of the portfolio was Rs 103 lakhs. Determine the portfolio’s rate of return for the quarter.
5. A and B are two portfolios. A has a sample mean of success 12% and B has a sample mean of success
16%. The respective Standard Deviation are 15% and 18%. The mean return for the market index is 12
and stabdard deviation is 8 while the risk-free rate is 8%. Compute the Sharp Index for the portfolios and
the market.
6. A mutual fund is trying to decide between two investment funds. From the past performance, they
were able to calculate the following average returns and standard deviations for these funds. The
current risk-free rate is 9.5 % and the fund will use this as a mesure of the risk-free rate:
Fund (X) Fund (Y)

Average Return (R) – percent 17 15
Standard Deviation (σ) – percent 16 12
Risk-free rate (Rf) - percent 9.5 9.5
7. You are asked toanalysis two portfolio s having the following characterstics:
Portfolio Average Return Beta Standard Deviation

A 18% 2 3
B 12% 1.5 2
The risk-free retun is 9%. The return on market portfolio is 15%. The standard deviation on market is 6%.
Compute: (i) Treynor’s index. (ii) Sharpe’s index for portfolio A and B. (iii) Sharpe’s Index for Market
Portfolio. (iv) Evaluate the portfolio performance.
38
8. The actual results of the portfolios and the market index during thepast years are given below:
Portfolio Return on Portfolio (Rp) Portfolio Beta Risk-free interest Rate

A 15 1.2 8%
B 12 0.8 8%
C 16 1.5 8%
Arket Index 13 1.0 8%
You are required to rank the portfolios according to Jensen’s measure of Portfolio Evaluation.
9. The details of three portfolios are given below. Compare these portfolios on performance using the
Sharpe, Trenor and Jensen’s measures.
Portfolio Average Return Standard deviation Beta

1 15% 0.25 1.25
2 12% 0.30 0.75
3 10% 0.20 1.10
Market Index 12% 0.25 1.00
The Risk-free rate of return is 9%
10. You are asked to analyse the portfolios having the following characterstics:
Portfolio Observed Return Beta Residual Variance

A 15% 2.0 0.03
B 12% 1.5 0.00
The risk-free return is 8% and the return on the market portfolio is 15% with the standard deviation of
0.06. Compute the Sharpe, Trenor and Jensen’s measures Portfolio Evaluation. Also calculate the Sharpe
Index for the market portfolio.
11. The details about the Mutual Fund and Market Portfolio are as follows:
Mutual Fund Market

Average Rate of Return 22% 20%
Standard Deviation of Return 16% 14%
Beta 1.20 1.00
Risk-Free Return 12% 12%
Compare the portfolio performance of Mutual Fund as well as market using Sharpe and Treynor’s Index.
12. Compare portfolio performance using Sharpe and Treynor measures for the following portfolios:
Average Return (%) Standard deviation Beta

Portfolio A 14% 0.25 1.25
Portfolio B 10% 0.15 1.10
The risk-free rate of return is 8%
13. Following information is given in respect of three Mutual Funds and Market:
39
Mutual Funds Average Return Std. Deviation Beta

A 12 18 1.1
B 10 15 0.9
C 13 10 1.2
Market 11 17 1.0
The mean risk free rate is 6%. Calculate the Treynor’s measure and Sharpe’s measure and rank the
portfolios.
14. The actual results of the Portfolio’s and the Market Index during the past three years are given
below:
Portfolio Return Beta Risk free interest rate

Birla 15% 1.2 9
Kotak 16% 1.5 9
Reliance 12% 0.8 9
Market Index 13% 1.0 9
You are required to rank these portfolios according to Jensen’s Measure of Portfolio Return.
15. Three Mutual Funds have reported the following rates of return and risk over last five years.
Growth Fund Return Standard Deviation Beta

HDFC 15% 15% 1.10
ICICI 13% 16% 1.25
UTI 12% 10% 0.90
Calculate the portfolio performance using Sharpe and Treynor’s Index. Which portfolio has performed
better?
16. Compare the following portfolios on performance using Sharpe, Trenor and Jensen’s measures and
rank them.
Portfolio Avg. Returns Std. Deviation Beta

1 15% 0.20 1.25
2 12% 0.35 0.75
3 10% 0.15 1020
Risk free return is 6%.
17. The details of three portfolios are given below:
You are required to rank these portfolios according to sharp’s and Jensen’s measures.
Portfolio Average Returns Standard Deviation Beta

A 12 0.25 1.30
B 15 0.30 1.80
C 10 0.20 1.20
Market Index 12 0.25 1.40
The risk-free rate of return is 8%
40
18. You are asked to analyse the two portfolios having the following characterstics:
Portfolio Observed return Beta Standard Deviation

Alpha 0.18 1.2 0.04
Gama 0.15 1.5 0.02
The risk free return is 0.09 and the return on Market Portfolio is 0.14 with Standard Deviaton of 0.05.
Compute the appropriate measure of performance of these portfolios and comment on their respective
performance. Use Sharpe’s Index and Treynor’s Index
19. Based on the below mentioned data decide whether the portfolio has outperformed the market in
terms of Treynor and Sharpe.
Particulars Portfolio Market

Average Rate of Return 22% 20%
Standard Deviation 16% 14%
Beta 1.20 1.00
Risk free Return 12% 12%
20. Based n the below mentioned data decide whether the portfolio has outperformed the market in
terms of Treynor, Sharpe and Jensen benchmark evaluation measures.
Particulars Portfolio Market

Average Return 7% 10%
Beta 0.4 1.00
Standard Deviation 3% 8%
Risk free rate 6% 6%

Portfolio Management and SAPM Book Tybms and Tybfm

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Portfolio Management and SAPM Book Tybms and Tybfm

Загружено:

Авторское право:

Доступные форматы

1

Chapter 1 - Risk and Return

Situation Probablity Conditional Returns %

2. Following is data relating the five securities.

Economic Conditions Probablity Returns of VCC Ltd. Returns of LCC Ltd.

(i) Only in shares of VCC Ltd.

(ii) Only in shares of LCC Ltd.

Which of the above options is the best? Why?

4. Calculate the return in the following example:

A Ltd. (Rs) B Ltd. (Rs.)

Co.’s Name No. of shares Purchase price

During the year 2001, Mr. Bhandari received the following:

Co.’s Name Dividend Bonus Shares

Co.’s Name Market Price

Calculate the holding period return.

Situation Change (P) Return (%)

Year 1 Year 2 Year 3 Year 4

Return on Security Probablity

State of Economy Probablity of Occurance Rate of Return

State of the Economy Probablity of occurence Rate of Return

Stocks Expected Amount invested

Particulars Boom Normal Recession

Boom Normal Recession

Boom Normal Recession

Boom Normal Recession

Economic Condition Expected Returns of

Boom Normal Recession

(iii) What would be your decision if the probablity changes to 30:40:30?

June, 2005 Rs. 800

Return on Stock X Return on Stock Y Probablity

State of nature Probablity Return ‘A’ Return ‘B’

(2) Calculate the standard deviation of stock A and B.

Economic Condition Probility Expected price of Share Expected price of Share

(ii) Mr. Ram wants to invest Rs. 10000

(1) Only in ABC Ltd.

(2) Only in XYZ Ltd.

Which is the better option? Justify.

State of Nature Probablity Return on X Return on Y

(i) Calculate the expected return on stock X and Y.

(ii) Calculate the Standard Deviation of both the stocks and

2003-04 2004-05 2005-06 2006-07 2007-08

23. Compute the expected return of an investment in the following security.

Economic Condition Probablity (P) Return on Investment (%)

Year 1 Year 2 Year 3 Year 4

Chapter 2 – The Time Value of Money

Year Cash Stream

Year Estimated Inflows

(a) What should be the right price he should accept?

21. An investment of Rs. 40,000 made on 01/04/02provides inflows as follows:

Date Alternative I Alternative II

Year Cash Flow

Face value of debenture Rs. 1,000

Annual Interest Rate 15%

Expected Return 12%

Maturity Period 5 years

32. An investment of Rs. 40,000 made on 1-4-2010 provides inflows as follows:

Year Alternative I Alternative II Discount Factor

Year Cash Flow Discount Factor

Year Cash Flow Discount Factor

Chapter 3 – Financial Statement Analysis

Balance Sheet as on 31-3-2005

Liabilities Rs. Assests Rs.

Particulars Rs. Particulars