Question Paper END EXAMINATION 2008

3rd MODULE ENDING EXAMINATION

FN 09(E) INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

Date: 3.4.2008 Duration: 3 Hours
Time: 2.00 PM to 5.00 PM Marks: 60

Note: 1. Answer any FOUR of the following questions. The question paper contains seven questions.
2. Each question carries 15 marks. Marks of individual questions are indicated at the end of each question.
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I (a).Explain the Finkel and Tuttle’s argument on determinants of operating profit margin.

(b). What is the result of empirical work of Reilly and Brown on this issue?

©. How do you plan to go ahead for estimating operating profit margin by incorporating Finkel and Tuttle’s arguments and Reilly and Brown’s empirical work? (5+2+2m)

(d). Calculate the 5 components required for making Dupont analysis for the two years 2002 and 2006. (6 m)

Table not posted here.

II(a). What is the objective of active portfolio management? What are the methods available to active portfolio managers to achieve that objective? Describe briefly the principles of analysis involved in implementing those methods. (9 m)

(b) There is a dog food company that has paid on average 40 percent of its earnings in dividends over the past business cycle. The company’s return on equity is 16 percent. The risk of this type of industry is low and hence required rate of return is 13 per cent. Can you specify a P/E multiple for this company using the given data. If so, give the P/E ratio along with the justification. If your answer is no, specify the extra information that you need apart from the information given. (6 m)

III (a) Name some surveys of sentiments and expectations. (2 m)

(b) Leading indicators approach and technical analysis approach seem to be similar - one for predicting business cycles and the other for predicting cycles in stock prices. Discuss (6 m)

© Value Line estimate of S&P 500 dividend return for year 200X is 2%. The capital appreciation return estimate for the same year is 5%. The 10 year Treasury note at the start of the year is 4.5%. Can you estimate the market risk premium from this data? If yes, estimate the market risk premium. ( 4m)

(d) If you want to forecast the sales of fertilizer industry what component of GDP would be used in regression analysis? Apart from the GDP component what other national level variables can be used in a multiple regression model for forecasting sales of fertilizer industry? (3 m)

IV (a) what are the stages in industry life cycle and what is the effect of each stage on sales growth and profit margins of companies in the industry? (6 m)

(b) Why is EBITDA preferred as a starting point for estimating EPS for the next year? (3 m)

© Explain the two types of analysis to be used to fix the risk premium for an industry relative to market. (6 m)


V. (a) The price of AXP Ltd, was Rs. 80 on 3 March 2008. The 50 day moving average on that day of AXP Ltd was 100.

The prices of AXP Ltd on trading days subsequent to 3 March 2008 were as follows

Rs.90, Rs.95, Rs.100, Rs.102, Rs.101.

The prices of AXP Ltd. in the first five trading days of the 50 days used for calculating the 50 DMA on 3 March 2008 were as follows.
Rs.130, Rs.110, Rs.115, Rs.95, and Rs.105.

Do the technical analysis of moving average of the situation and give your call on the stock in the two cases: (1) filter rule is used, and (2) filter rule is not used. (8 m)

(b) Explain the portfolio evaluation metrics – Sharpe ratio, Treynor ratio, Jensen’s alpha and Information ratio. Can you incorporate them into the investment policy statement. Briefly give the contents of IPS and tell wherein you will incorporate them. (7 m)

VI.(a) Explain the alternative methods used by Reilly and Brown to estimate the sales of retail drug distributor Wall Greens (6 m)

(b) Discuss the issues involved in estimating interest expense for a company for an upcoming year. (3 m)

© What is the recommended procedure of estimating depreciation? Do you see any difference in estimate of depreciation if a time a series analysis of depreciation is used instead of the recommended method? Justify your answer. (6 m)

VII.(a) Discuss appropriate methods for conservative investment valuation of equity shares. (8 m)

(b) Discuss appropriate methods for trading with a one year horizon in companies facing various difficulties. (7 m)


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