Securities Analysis And Portfolio Management

St. Joseph’s College of Commerce (Autonomous)

End Semester Examination – April 2011

M.Com – IV Semester

Strategic Financial Management

Duration: 3 Hours                                                                                   Max. Marks: 100

Section – A

I)Answer TEN questions.  Each carries 2 marks.                                            (10×2=20)

• What is a Strategy?
• What is the meaning of Cost of Capital?
• What is Demerger?
• What is Ethical Brand Equity?
• What is the meaning of Acquisition?
• What is role of Executive Compensation under value Based Management?
• What is the main objective of BCG Approach?
• What is the meaning of Enterprise Governance?
• What is the meaning of Indexed Stock options?
• Differentiate between EPS & EBIT?
• What is the importance of Market to Book Ratio?
• Explain the acronym CFROI.

Section – B

II)Answer any FOUR questions.  Each carries 5 marks.                            (4×5=20)

• Write a short note on Balanced Score Card.
• Differentiate between MVA & EVA.
• Explain the areas of Value thinking with reference to Mckinsey Approach.
• What are the features of Strategic Financial Management?
• What are the kinds of takeover?
• What are the Ethical Dilemmas faced by a Strategic Financial Manager?

Section – C

III) Answer any THREE questions.  Each carries 15 marks.                      (3×15=45)

• Briefly explain the interface of financial policy & strategic policy.
• Explain the Concept involved in EBITDA.
• What are the different approaches in calculation of Corporate Approach?
• What are the factors affecting Dividend Policy?
• What are the strategies used against anti-take over bids.

Section – D

1. IV) Compulsory

question –  Case Study                                                            (15 marks)

• Mergers and Acquisition – A Case Study and Analysis of HP-Compaq Merger

HP

It all began in the year 1938 when two electrical engineering graduates from Stanford University called William Hewlett and David Packard started their business in a garage in Palo Alto. In a year’s time, the partnership called Hewlett-Packard was made and by the year 1947, HP was incorporated. The company has been prospering ever since as its profits grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. Starting with manufacturing audio oscillators, the company made its first computer in the year 1966 and it was by 1972 that it introduced the concept of personal computing by a calculator first which was further advanced into a personal computer in the year 1980. The company is also known for the laser-printer which it introduced in the year 1985.

Compaq

The company is better known as Compaq Computer Corporation. This was company that started itself as a personal computer company in the year 1982. It had the charm of being called the largest manufacturers of personal computing devices worldwide. The company was formed by two senior managers at Texas Instruments. The name of the company had come from-“Compatibility and Quality”. The company introduced its first computer in the year 1983 after at a price of 2995 dollars. In spite of being portable, the problem with the computer was that it seemed to be a suitcase. Nevertheless, there were huge commercial benefits from the computer as it sold more than 53,000 units in the first year with a revenue generation of 111 million dollars.

Reasons for the Merger

Carly Fiorina, who became the CEO of HP in the year 1999, had a key role to play in the merger that took place in 2001. She was the first woman to have taken over as CEO of such a big company and the first outsider too. She worked very efficiently as she travelled more than 250,000 miles in the first year as a CEO. Her basic aim was to modernize the culture of operation of HP. She laid great emphasis on the profitable sides of the business. This shows that she was very extravagant in her approach as a CEO. In spite of the growth in the market value of HP’s share from 54.43 to 74.48 dollars, the company was still inefficient. This was because it could not meet the targets due to a failure of both company and industry. HP was forced to cut down on jobs and also be eluded from the privilege of having Price Water House Cooper’s to take care of its audit. So, even the job of Fiorina was under threat. This meant that improvement in the internal strategies of the company was not going to be sufficient for the company’s success. Ultimately, the company had to certainly plan out something different. So, it

was decided that the company would be acquiring Compaq in a stock transaction whose net worth was 25 billion dollars. Initially, this merger was not planned. It started with a telephonic conversation between CEO HP, Fiorina and Chairman and CEO Compaq, Capellas. The idea behind the conversation was to discuss on a licensing agreement but it continued as a discussion on competitive strategy and finally a merger. It took two months for further studies and by September, 2001, the boards of the two companies approved of the merger. In spite of the decision coming from the CEO of HP, the merger was strongly opposed in the company. The two CEOs believed that the only way to fight the growing competition in terms of prices was to have a merger. But the investors and the other stakeholders thought that the company would never be able to have the loyalty of the Compaq customers, if products are sold with an HP logo on it. Other than this, there were questions on the synchronization of the organization’s members with each other. This was because of the change in the organization culture as well. Even though these were supposed to serious problems with respect to the merger, the CEO of HP, Fiorina justified the same with the fact that the merger would remove one serious competitor in the over-supplied PC market of those days. She said that the market share of the company is bound to increase with the merger and also the working unit would double.

Question:

Critically analyse the decision for merger in the above case and put forward your justifications.

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St. Joseph’s College of Commerce (Autonomous)

End Semester Examination- April 2013

MIB – IV Semester

 SECURITIES ANALYSIS AND PORTFOLIO MANAGEMENT

Duration:  3 Hours                                                                                        Max. Marks: 100

Section -A

1. Answer ANY SEVEN questions                                                                   (7×5=35)

1. “The RBI’s decision to cut rates will help revive investment in the economy,” Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, said, adding that the economy was beginning to bottom out after a long slowdown. He was referring to the Repo rate and CRR. Explain how?
2. India has a BBB- rating from S&P, the lowest investment grade among the BRIC group of large emerging economies and one notch above “junk” status. In the light of the above, write a note on credit rating symbols and junk bonds.
3. There is this joke about a dealer whose trades were based on technical calls. One day his boss asks him which stock he is trading on, and he answers ‘Ford’. “Great company. In fact own a Ford car,” says his boss. “I didn’t know they made cars,” the technical trader replies. Bring out the meaning of the above statement by differentiating between Fundamental analysis and Technical analysis.
4. HDFC Bank, the country’s second largest private sector bank has suspended around 20 employees pending enquiry into the allegations made by Cobrapost representatives, stating that the bank employees are encouraging money laundering. Explain money laundering with special emphasis on the present case.

5. Suppose an edible oil importer wants to import edible oil worth USD 100,000 and places his import order on July 15, 2008, with the delivery date being 4 months ahead. At the time when the contract is placed, in the spot market, one USD was worth say INR 44.50. But, suppose the Indian Rupee depreciates to INR 44.75 per USD when the payment is due in October 2008, the value of the payment for the importer goes up to INR 4,475,000 rather than INR 4,450,000. What would be his hedging strategy?

6. You are an Investment consultant with rich experience in equity research and portfolio management. You are requested by a client to give a presentation on equity valuation. You prepare the following:

• The equity stock is currently selling for INR 30 per share. The dividend expected next year is INR 2.00. The investor’s required rate of return on this stock is 15%. If the constant growth model applies, what is the expected growth rate?

• The equity share is expected to provide a dividend of INR 2.00 and fetch a price of INR 18.80 a year hence. What price would it sell for now if investors’ required rate of return is 12%?

7. (a) ABC Co. has a Days Sales Outstanding ratio of 60 days. Total credit sales for the year were $2,400,000. What is the balance in accounts receivable?

• If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm’s times interest coverage ratio?

1. Is subscription to 6-year post office monthly income scheme considered as investment? Why?

9. What are the qualitative factors to be considered for Company Analysis?

10. Explain diagrammatically the concept of role reversal in Technical Analysis.

Section -B

1. Answer any THREE (3×15=45)

1. (a) What are the different stages of industry cycle and the main features of such stages?

• What is five-force analysis and its utility for industry analysis?

(8+7)

1. (a) Consider the following information of three mutual funds A, B and C and the market.

The mean risk free rate was 6%. Calculate the Treynor measure and Sharpe measure to evaluate the MF performance.

(b) What are the various methods of classification of Mutual Funds on the basis of investment objective?

(8+7)

1. (a) Briefly explain the E-I-C framework of Fundamental Analysis.

• The total risk of a portfolio consist of two parts: Market risk (systematic) and Unique risk (unsystematic). Explain.

(8+7)

1. The stock of P Ltd performs well relative to other stocks during recessionary periods, while the stock of Q Ltd does well during the growth period. Both the stocks are currently selling for INR 100/share. The rupee return (dividend plus price) of these stocks for the next year would be as follows:

Calculate the expected return and standard deviation of:

• INR 1000 in equity stock of P Ltd
• INR 1000 in equity stock of Q Ltd
• INR 500 in equity stock of P Ltd and INR 500 in Q Ltd.
• INR 700 in equity stock of P Ltd and INR 300 in Q Ltd.

Which of the above 4 options would an investor choose and why? (15 marks)

1.  (a) The returns on the equity stock of Auto Electricals Limited and the market portfolio over a 11 year period are given below:

Calculate the beta for the stock of Auto Electricals Limited.

(b ) Explain the relationship between coupon rate, required yield and price of a bond.

(10+5)

1. (a) What do SML and CML represent?

• Suppose a company has issued 1975 lakh shares of which 900 shares are promoters’ holdings and its closing price on BSE on say May 10, 2009 was INR 350 per share. , The market capitalization on May 9th 2009 was 354420 lakhs. The index value on the same day was 5620 points. How will the index on May 10th be calculated? Explain the method employed to calculate the index.

(8+7)

Section C

• Case study – Compulsory Question.                                (15+5 marks)

1. (a) What are the 4 main types of charts used in Technical Analysis? Show them diagrammatically and differentiate between them.

Technical analysts believe that certain formations or patterns observed on the bar chart or line chart have a predictive value. Explain how the following patterns help such an analyst to predict stock behaviour.

• Give a summary of option pay off patterns