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Section D : Case Study (50 Marks) · This section consists of questions with serial number 1 - 5. · Answer all questions. · Marks are indicated against each question. · Do not spend more than 80 - 90 minutes on Section D. Case Study Read the case carefully and answer the following questions: 1. Perform Michael Porter analysis of the Indian Sugar
Industry. (10 marks) < Answer > 2. Comment on the financial health of Balrampur Chini Mills Ltd. (BCML) based on the financial statements and ratios given in the Annexure- I (10 marks) < Answer > 3. From the data provided in Annexure- I, you are required to estimate the probability that the return from the stock of Balrampur Chini Mills Ltd. (BCML) would be between zero and 40% during January –June 2004. (7 marks) < Answer > 4. Based on the information given in Annexure-I, you are required to a. Estimate the regression equation (Security Market Line) depicting the relationship between beta and expected return. b. Calculate required rate of return on the share of Balrampur Chini Mills Ltd, using the relationship found in (a). c. Calculate the perpetual dividend growth rate required by the Balrampur Chini Mills Ltd according to the dividend discount model to support its stock price of Rs.414.80.Assume that dividend paid during the year 2003-04 was Rs.10.00 per share. (4 + 6 + 3 =13 marks) < Answer > 5. Comment on whether the stock should be bought, sold and held at points A, B, C, D and E based on the share price charts given in Annexure I. (10 marks) < Answer > Indian Sugar Industry India
is the second largest producer of sugarcane next to Brazil, with approximately
about 4 mn hectares of land under sugarcane. The average yield is to the
extent of 70 tonnes per hectare. However, in the current sugar season, India
has emerged as the world’s leading producer, pushing Brazil to the second
place. This achievement has not brought much cheer to the domestic sugar
industry, as the industry has been already been burdened with huge opening
stock. The additional production of 18.2 mn tonnes has led to a further
pile-up due to a slow growth in offtake. The
Indian Sugar industry is the country’s second largest agro-processing
industry with the production capacity of over 18 mn tonnes of white crystal
sugar annually. Presently, the total turnover of the industry is about Rs 200
bn with the total capital employed at about Rs 160 bn. Nearly 45 mn farmers
and their families depend directly on sugar industry. In the
FY 99-00, India’s sugar output of 18.2 mn tonnes raw value has broken all its
past records. Per capita consumption, however, is only a little over half the
global average, 16 kgs versus 26 kgs internationally. Sugar
is an important food item, with a weight of 4.06% in the wholesale price
index. In a country like India, where inflation affects voting pattern, sugar
prices has an impact on future voter behavior. Politics is an important
determinant of the industry policy. Powerful sugarcane lobbies influence
political fortunes in states of Uttar Pradesh and Maharashtra. Over
the last four decades sugar production has grown at a CARG of 6%. Both,
capacities and production in the sugar industry have kept pace with increases
in consumption and the growth in population. According
to an International study, India ranks second in field cost of sugarcane,
next only to Australia. Presently, about 2.2% of cultivated area is under
sugarcane. India thus offers great potential for expansion of area and
sugarcane and sugar production. INDUSTRY STRUCTURE With
430 mills in the country capacities are highly fragmented. The cooperative
sector, with the largest number of mills, is the most powerful lobby in the
industry and has a substantial influence on policy. The
average annual capacity of Indian mills is 28,500 tonnes of sugar, much lower
than found internationally. Cane crushing capacity of 13.4 mn mt is
concentrated in the important sugarcane growing states of Maharashtra, Uttar
Pradesh, Tamil Nadu, Gujarat, Karnataka and Andhra Pradesh. Performance
varies across states and the sugar industry is usually divided into those
based in the north and in the south. Operating
parameters, efficiency and profitability differ significantly between these
two segments. There is substantial difference in cane yield, the duration of
the crushing season, diversion and recovery rates across the northern and
southern states. INDUSTRY DYNAMICS Historically,
sugar has been a politically sensitive industry and government policies
rather than economics have driven its performance and direction. Erratic
production trends, and the fact that sugar is an essential commodity with a
significant rural population associated with its production, resulted in the
industry becoming a target of excessive government regulation. These controls
cover issues of raw material sourcing, pricing, distribution and foreign
trade. Until
recently, the government decided entry into the industry and capacities as
well, but delicensed the industry on August 31, 1998. A dual price mechanism
currently exists under which companies surrender 30% of their output (levy
sugar) to the government at subsidised prices for sale through its public
distribution system. Companies are free to dispose the remaining 70%
(free-sale sugar) at prices determined by the market. The government also
regulates release of free sale sugar into the market. Cane
availability for sugar production is limited by its diversion for production
of crude sweeteners, gur and khandsari, which are important food items in
rural India. Sugarcane
competes with various crops like wheat, paddy, oilseeds and pulses in most
cane growing states. Sugarcane output typically reacts to the minimum support
prices (the minimum price at which state agencies will lift all the farm
output) announced before the sowing season by the government for cane and
other crops. High support prices announced by Central and State governments
causes acreage to shift away from other crops to cane and vice versa. Cane
arrears (dues outstanding to farmers for cane purchased by mills) is another
important influence on sugarcane output. Large arrears result in decline in
cane production in subsequent years leading to poor sugar production and
higher price realisations for mills. This cycle has been played out several
times in the past. By products of sugar and
their uses Sugar
production yields bagasse (fibrous residue of cane after juice extraction)
and molasses (liquid residue after all sugar is recovered) as by-products
which can be used for setting up down stream capacities. Bagasse can be used
as a fuel to fire boilers to generate steam and further to generate
electricity. It can also be used to make particle board or paper. Molasses is
used by distilleries to manufacture potable or industrial alcohol that is
further used by the liquor or the chemical industry. SUPPLY The
sugar production has fluctuated over the years showing a distinct cyclical
trend. Slack years are followed by boom years. The duration of both, slack
and boom periods, has varied from between one and four years. In the years of
surplus production, sugar was exported out of free sale quota. In the periods
of shortages India turned a net importer. The overall scenario has been that
of marginal export of sugar. A
license is no longer necessary to set up a new sugar unit or expand existing
capacity. The spatial clause applicable to new sugar units continues. A new
mill must be at least 15 km from an existing one. The Centre and the State
control the price of cane. The Central government announces a statutory
minimum price (SMP) every year before the sowing season based on an average
recovery rate of 8.5% sugar with every 0.1% increase in recovery thereafter
qualifying for a premium. PRICING DISTRIBUTION & TRADE Distribution
of the 70% free sale sugar is also controlled through a monthly release
mechanism, which regulates the quantities released every month. This
mechanism helps maintain the retail price within a tolerable band. Each mill
is awarded a quota each month depending on the stocks available with it.
Companies must release at least 47.5% of this quota each fortnight. Since
March 1994 the government has placed sugar on the open general license (OGL)
with nil duty on imports. Poor international prices in 1998 led to large
scale dumping of sugar in India. The government intervened, in April 1998, by
imposing a basic customs duty of 5% and an additional duty of Rs 850 per
tonne, including the cess. In
January 1999, it increased this to 20% and after the restructuring of customs
duties in the budget for FY2000 the duty stood restructured to 27.5% with the
additional duty of Rs850/tonne remaining intact. In January 2000 the
government raised customs duty on sugar imports to 60%, and they also have to
pay Rs850 per tonne as countervailing duty. The imported sugar has been
brought under the levy and monthly release mechanisms too. Although
India is the world’s largest producer of sugar, sizable domestic demand and
erratic domestic production leaves little or no exportable surplus. Indian
has been both an importer and an exporter, intermittently, depending on the
size of its cane harvest and available buffer stocks. Exports
are restricted and annual export quotas were announced by the central
government. Exports were carried out by a central agency, the Indian Sugar
& General Import Export Corporation (ISGIEC) but the government has now
decanalised sugar exports. DEMAND India
consumed 15 mn tonnes of sugar during FY00, apart from the crude sweeteners
(another 8.8 kgs per capita). This consumption, on the average, can be broken
up as monthly consumption of around 1mn tonnes - 0.6 to 0.7 mn tonnes through
the free sale market and balance through the PDS. Demand
for sugar can be divided into two areas: domestic consumption and
institutional consumption. Typically, 70% of the free sale sugar is consumed
by institutions, with the remaining consumed by households. Institutional
demand can be further broken into hotels, confectionery manufacturers, soft
drink manufacturers and the food processing industry. Growth
in consumption is driven primarily, by growth in population. This has
resulted in an increase in per capita consumption. Historically, consumption
has been growing at a steady rate of between 4 and 5% but this figure could
increase in the future, spurred by the growth in the food processing industry
– confectionery, soft drinks and other food processing industry. Installed
capacity has been growing at a rate slightly higher than 5%. EXPORTS The
export quota fixed by the Government has been a mere 1mn tonnes. Currently,
at about $ 285 a tonne, it is not attractive and will have to compete with
countries, which subsidise their exports of this commodity. Domestic prices
are about 20% above global prices. Though
Exports are one option to reduce stocks but it is moving in trickles.
However, next year could see better exports. India is already exporting to
its neighbours with the Government having cleared 12,000 tonnes this year to
Pakistan. Other important export destinations could be Sri Lanka and
Bangladesh. If the stockpiles are allowed to remain and with no real support
extended to exports, the industry would again be caught in a vicious cycle of
deficit, as unprecedented stocks would mean unpaid prices to the farmers for
the sugarcane supplied. PROSPECTS The
industry’s growth prospects lie in consolidation of capacities, raising cane
yields and improving recovery rates. If nothing were done soon, having
reached the premier status in terms of output, India would only slip
backwards. Any policies initiated for the sector must now meet the objective
of making the sector globally competitive. Balrampur
Chini Mills Limited Business
Profile Balrampur
Chini Mills Ltd, (BCML) is the largest sugar company in India. The company
took over Babhnan Sugar Mills , a loss-making private company, in 1991.
Babhnan's performance improved significantly thereafter and its capacity has
been increased to 5,500 tcd (tonnes crushed per day) . BCML is
willing to grow through acquisition of mills, mainly in Uttar Pradesh. Operational
Excellence The
company's modest cost of production comes from a complement of men and
material.Balarampur's inspired people skills are guided by sytstems-driven
practices that set it distinctly aprt from the other manufactures in the
industry. As a
result, all of Balarampur's incremental capacities have been commissioned on
schedule - a rare industry achievement.Thanks to this intangible people
asset, Balarampur commands an alchemist's position in its business i.e the
ability to turn unviable plants around in the shortest possible time and
strengthen the working of its existing profit-making factories. The
other driver of Balarampur's competitiveness is its elaborate supporting
infrastructure. This comprises a comprehensive network of cane collection
centre as well as a fleet of trucks and trailers that transport the cane to
the plant. A wireless telecom network monitors the progress of vehicles
across the entire network. This enables the consignment to reach the factory
just when it is scheduled to be crushed, minimizing juice loss and maximizing
recovery. Recent
Developments BCML
has decided to set up a fully-automated integrated sugar complex in Uttar
Pradesh with an investment of Rs 120
crore. Funding will be through debt and internal accruals in the ratio of
1:1. To be set up in Barabunki, the complex will have a 4,000 tcd capacity
sugar factory, a 60 kilo-litre per day ethanol plan, a 16-MW cogeneration
plant and a bio-compost manufacturing plant. In
addition to the integrated complex, the company has plans to set up a
distillary to produce ethanol at its Bhabnan unit. By the production of a
variety of sugar derived products, the company will be able to cushion flat
sugar realisation with surpluses from its ancillary business. The company is aiming at integration and product value
addition. Balrampur Chini`s byproduct, bagasse will be consumed by its two
power plants, and molasses will be consumed by the ethanol plant. Future
Plans BCML
is working out a detailed plan for its foray into the branded sugar market
though a brand name is yet to be decided upon. The company is aiming at
integration and product value addition. Balrampur Chini`s byproduct, bagasse
will be consumed by its two power plants, and molasses will be consumed by
the ethanol plant. Annexure - I Financial statements of Balrampur Chinni Mills Ltd. Profit & Loss Account (Rs. in crore)
Balance Sheet
(Rs. in crore)
Financial
Ratios **
**Note: All balance sheet figures are average of two years
and profit and loss figures are annualised Technical Analysis Charts of Balrampur Chini
Mills Ltd. Moving Average Chart
Moving Average
Convergence Divergence (MACD) Chart
Rate of Change (ROC) Chart
Relative Strength Index
(RSI) Chart
Beta Vs. Expected Return
Movement of Stock Price and the Market Index
END OF SECTION D Section E : Caselets (50 Marks) · This section consists of questions with serial number 6 - 11. · Answer all questions. · Marks are indicated against each question. · Do not spend more than 80 - 90 minutes on Section E. Caselet 1 Read the caselet carefully and
answer the following questions: 6. The caselet states that prices of TMT shares rose first, and then fell, by more than the market as a whole, their betas increased during the bubble and its aftermath. And because beta for the whole market must be equal to one, betas for other, old-economy shares fell. That implies some large adjustments to betas. Briefly describe how would you adjust the beta of these stocks for investment analysis purpose. (10 marks) < Answer > 7. According to the caselet,
CAPM was questioned a decade ago when a paper by Eugene Fama and Kenneth
French, then both at the University of Chicago, showed that the shares of
small companies and “value stocks” (shares with low price-earnings ratios) do
much better over time than their betas would predict. Enumerate the
shortcomings of Capital Asset Pricing Model (CAPM). (8 marks) < Answer > Since the stockmarket bubble burst
more than three years ago, investors have had ample time to ponder where to
put the remains of their money. Economists and analysts too have been
revisiting old ideas. None has been dearer to
them than the capital asset pricing model (CAPM),
a formula linking movements in a single share price to those of the market as
a whole. The key statistic is “beta”: the proportion of a given change in the
market that, on average, is reflected in the price of the share. Beta has taken a beating along
with investors' wallets. A recent study by André Annema and Marc Goedhart of
McKinsey, a consultancy, argues that the bubble in technology, media and
telecoms(TMT) shares has had a long-lasting effect. Because the prices of
these shares rose, and then fell, by more than the market as a whole, their
betas increased during the bubble and its aftermath. And because beta for the
whole market must be equal to one, betas for other, old-economy shares fell.
That implies some large adjustments to betas. In any case, many investors and
managers have already given up on beta. Although it is useful for compiling
share portfolios—in particular, for working out their overall correlation
with the market—it tells you little about share-price performance in absolute
terms. In fact, the CAPM's obituary was already
being written more than a decade ago when a paper by Eugene Fama and Kenneth
French, then both at the University of Chicago, showed that the shares of
small companies and “value stocks” (shares with low price-earnings ratios) do
much better over time than their betas would predict. However, pointing out
this problem raises another one: why should small size or low market value
make a company a better bet than any other? Another new paper, by John
Campbell and Tuomo Vuolteenaho of Harvard University, tries to resuscitate
beta by splitting it into two. The authors start from first principles. In
essence, the value of a company depends on two things: its expected profits and
the interest rate used to discount these profits. Changes in share prices
therefore stem from changes in one of these factors. From this observation, they
propose two types of beta: one to gauge shares' responses to changes in
profits; the other to pick up the effects of changes in the discount rate.
This helps them explain the performance of small and value companies. Shares
of such companies are more sensitive than the average to news about profits,
in part because they are bets on future growth. Shares with high
price-earnings ratios vary more with the discount rate. In all cases,
above-average returns compensate investors for above-average risks. Beta is a tool for comparing
shares with each other. Recently, however, investors have been worried about
equity as an asset class. Even though shares have recovered some of their
losses in recent months, the crash has left investors asking what became of
the fabled equity premium, the amount by which they can expect returns on
shares to exceed those from government bonds. The recent rise in the bond
market has made the question even more pertinent. History says that shareholders
have a lot to be optimistic about. Over the past 100 years, investors in
American shares have enjoyed a premium, relative to Treasury bonds, of around
seven percentage points. Similar effects have been seen in other countries.
Some studies have reached less optimistic conclusions, suggesting a premium
of four or five points. But even this makes shares far more attractive, in
the long run, than bonds. Caselet 2 Read the caselet carefully and
answer the following questions: 8. According to the caselet, announcements of bonus offers and stock splits have led to a sharp rise in share prices. The magnitude of price increase is unwarranted in quite a few cases. Do you agree? Discuss. (6 marks) < Answer > 9. Discuss the motives behind a stock split and advantages it provides to the company and its shareholders. (10 marks) < Answer > Even as equity market continues to be volatile and hovers about 12 per cent off highs, announcements of bonus offers and stock splits have led to a sharp rise in share prices. The magnitude of price increase is unwarranted in quite a few cases. The Unichem Labs stock, for instance, doubled after the announcement of a bonus and stock split. Berger Paints' stock rose by about 50 per cent. Jubilant Organosys' stock, after a relentless uptrend that took the price past the Rs 1,000-mark, has settled ex-bonus at about Rs 715. Bonus issuers include the likes of Indian Oil Corporation, Exide Industries, Asian Paints, i-Flex Solutions, G G Automotive Gears, Moser Baer (India), Wockhardt, FDC and Marico Industries. The trends over the past nine months are a contrast to the lukewarm response that bonus offers and stock splits used to elicit earlier. For instance, when Elgi Equipment split its stock about two-and-a-half years back, it had no effect on valuation. It was only when the fundamentals gathered strength that the stock began to attract interest in 2003, aided by enhanced liquidity. The Elgi experience suggests that if the market moves into a sluggish phase, such actions may not lead to the nature of uptrend that has been seen over the past year. Companies that completed the process in the bull market may also find their stocks being marked down subsequently. The magnitude and pace at which prices get ramped up following such announcements also provide opportunity for informed trading. The possibility of management and market operators acting in tandem to announce such corporate actions and profit from the inevitable uptrend in bullish market conditions cannot be ruled out. At present, such actions can take effect over a two three-month period depending on the pace at which the legal formalities are completed. SEBI needs to tighten the time frame to minimize the scope for abuse. There has been no instance of shareholders not approving a stock split or a bonus offer. The possibility of changing the law to allow stocks to trade on an ex-stock split or bonus basis with a specified period of, say, 15 days from the date of announcement by the board of directors has to be considered. This would represent a substantial change from the present system. But it may be an idea worth pursuing. If, in the rare case, shareholders disapprove of the move, there must be the flexibility to restore status quo. Caselet 3 Read the caselet carefully and
answer the following questions: 10. What are the commanalities between Technical Analysis and Fundamental Analysis? The caselet appears to be suggesting that fundamental analysis is better than technical analysis. Do you agree? Justify. (8 marks) < Answer > 11. How can a head and shoulders pattern be said to be a bearish signal? Explain with reference to the tug-of-war between the buyers and the sellers mentioned in the caselet. (8 marks) < Answer > Technical analysis (TA), also known as charting, has been around for more than 100 years, and many of its age-old catch phrases, such as “the trend is your friend,” have become Wall Street truisms. But thanks to a proliferation of software programs and Web sites that give individuals access to the charting tools once reserved for institutions, technical analysis has gone more mainstream. And even though most investment pros and academics question its validity, the sheer number of enthusiasts popping up on CNBC and stock message boards makes one wonder, Is this alien tongue worth deciphering? Despite its elaborately named indicators, technical analysis is based on a simple premise : Past stock prices can be used to predict future stock prices. Fundamentals may drive stock prices in the long run, chartists say, but near term, what’s important is supply and demand. If investor demand for shares is greater than the number of shares selling at a particular price, the stock will rise; conversely, if there are more sellers at a certain price than buyers, the price will fall. A chart of stock price – whether drawn with bars, lines, or Japanese candlesticks – is a snapshot of the tug-of-war between buyers and sellers. This picture, chartists say, is worth a thousand balance sheets and research reports. Why? Because fundamental information is already reflected in stock prices. If a company’s fundamentals improve, investors will buy shares, and that will be captured in the stock chart. Chartists generally don’t care why a stock is rising never mind what business the company is in - only that it has started to move. The key is to spot a buying trend just as it occurs and ride it up before demand weakens. But if a price chart shows only what has happened up to the present, how can it predict a future trend? Technical analysts believe that investors tend to react in predictable ways to situation they’ve faced in the past. To see where prices are going, a chartist simply compares the current picture to similar charts from the past. This has evolved into various chart patterns. A head-and-shoulders pattern, for example, suggests that demand for the stock has peaked and is about to drop. A double bottom, formed by a stock hitting the same low twice, is bullish, indicating that buyers outnumber sellers. Aficionados claim that these time-honored tools can be applied to most securities, including currencies and commodities. If only, before you cancel your subscription to Value Line and toss those annual reports, keep in mind that the efficacy of technical analysis is only slightly less controversial than the existence of UFO’s. Ever since the first recognized technical method, later dubbed the Dow Theory, was set forth in the 1890’s by the cofounder of the Wall Street Journal, Charles H. Dow, fundamental investors have argued that the stock market is much too complex to be represented by a simple graph. Dow proposed that the market’s overall trend could be determined by examining the relationship between the Dow industrial average and the Dow railroad average (now the transport average): both indices moving in the same direction signals a bull (up) or bear (down) market, whereas a divergence between the two is inconclusive. But can a chart, skeptics of the theory cry, really anticipate such fundamental information as a change in the economy? More recently, academics such as Burton G. Malkiel, author of A Random Walk Down Wall Street, have argued that efficient markets undermine charting strategies. END OF SECTION E END OF QUESTION PAPER |
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Section D : Case Study Entry barriers are high in this industry due to uncertain government regulations and capital intensive nature of the industry. The industry is capital intensive, Indian sugar industry is highly fragmented with organized and unorganized players. The unorganized players mainly produce Gur and Khandari, the less refined forms of sugar. The government had a controlling grip over the industry, which has slowly yet steadily given way to liberalization. Central government Policy also directly influences pricing, production and distribution of sugar. Maximum Retail Price (MRP) of sugar is also decided by the central government. Clearly, government regulations also act as big entry barrier to the industry. Bargaining power of Suppliers The sugarcane producer enjoys central importance of the government. The minimum price at which sugar companies can purchase the sugarcane is decides by central govt. and state govt. Government also supports the farmer by deciding the prices of the Sugars. Therefore, bargaining power of suppliers can be said to be high in the sugar industry. Bargaining power of Customers Individually, customers have very little bargaining power with retail stores selling sugar. It is very difficult to bargain a general shopkeeper for a better price on sugar. But organized and large institutional consumers such as hotels, confectionery manufacturers, soft drink manufacturers and the food processing industry may demand high quality products at bargain prices. Threat of Substitute Threat of substitute is low as there are no direct alternatives available for sugar. However, sweetening agents such as jaggery, lactose, sorbitol, honey, liquid glucose do pose some threat to standardized product of the industry. Competition
among the existing Players As the industry is a fragmented one, even leading players do not control more than 4 percent market in India. However, the situation is changing and players off late are striving to increase their market share either by acquiring smaller mills or by going for green field capacity additions. The competition is high in this industry as all the major companies are striving for higher market share. 2. a. The profitability of the company is showing fluctuating trend. During year 1999-2000 and 2002-03 it fell down sharply. The profit after tax has gone down drastically during 1999-2000 and 2002-03 however topline (sales) has increased considerably during both year and declined during 2001-02. Raw material cost, other manufacturing expenses and selling cost have increased substantially during 1999-2000 and 2002-03 causing huge drain in the profitability of the company during these years. b. Gross
profit margin, return on networth, return on capital employed and EPS have confirmed the decline in
the profitability during the year
1999-2000 and 2002-03 . c. The
current ratio of the company is not very comfortable which is apparent from
its continuous decline during the last
five years. Debt-equity ratio
and interest coverage ratio are at comfortable levels. d. The
turnover ratios except debtor turnover ratio have been steadily improving,
both relating to fixed assets as well as inventory. The debtor turnover ratio
however, is declining. e. Interest
payments have decreased during year
2001-02 indicating repayment
of some loan and it has further decreased
during 2002-03 due to switch over by the company towards cheaper unsecured loans. f. In the year 1999-2000 and 2000-2001, total preference capital have been repaid. Unsecured loan has increased drastically during 2002-03. Decline in investment during the last five years have been compensated by increase in capital work-in progress.
Mean return on the stock = 26.011% The standard deviation of the return of BMCL stock = 43.01 % Probability that the return will be between zero and 5% can be calculated as follows: or or -0.6047 < Z <0.3252 From the normal distribution table, the area for -0.6047®0.2727 0.3252®0.6274 Z = 0.6274 – 0.2727 = 0.3547 = 35.47% 4. a. The equation for SML can be derived by running a regression between the beta values given and the corresponding return:
åX = 11, åY= 134, n = 8 åXY=213.5, åX2 = 20
The coefficient of regression
(Slope) b = 29.25/ 4.875 = 6 The Y
intercept a = Value of A (Rf) = 8.50 Value of B (Rm – Rf) = 6.0 The equation is 8.50 + 6.0b Where b is the beta of the stock. b. The beta of Apollo Tyres can be determined based on the returns from the stock and the returns on the index.
åX = 77.21, åY= 156.1, n = 6 åXY=8282.87, åX2 = 6340
The coefficient of regression
(Slope) Beta = Beta = 1.174 Beta of Apollo Tyres = 1.174 Expected return from Apollo = 8.50 + 1.174 X 6 = 15.54% c. According to DDM, P0
= 414.80 ´ 0.1554 –414.8x = 10 +10x 64.46 – 10.0 =414.8x +10x x = 5. A. At this point both moving average and price line have started rising hence it is an indication to buy the stock. B At this point MACD line is well above its reference line and about to decline therefore stock should be sold. C. As ROC line has started moving up it is an indication to buy the stock. D. RSI has touched the oversold position and price rise is expected, it is an indication to buy the stock. E. RSI has touched the overbought position and price decline is expected, it is an indication to sell. Caselet 1 6. Investors should strip out the effects of the bubble. Market data from the past three to five years would be an appropriate basis for beta estimates only if we expected historical correlations of performance and relative valuations among sectors to persist in the future. However, sharp declines in TMT valuations suggest that past few years were indeed an extraordinary period, unlikely to be repeated in the future. Indeed, the TMT sector share of the total market capitalization is already back to its average 20-year historical levels. Moreover, analysis of the past months indicates that betas for many nontech sectors are increasing as TMT valuations decline. For many sectors, these recent beta estimates are also much more in line with their pre-1998 values. To eliminate the distortion of the high-tech bubble, practitioners should combine historical estimates of betas prior to 1998 with data from after 2000. For example, eliminating the impact of the TMT boom implies a beta of 0.65 for the food, beverage, and tobacco sector. A beta at that level is more consistent with the sector’s average historical beta of 0.85 between 1980 and 1998, and it contrasts sharply with the low 0.02 beta that an unadjusted approach would produce. The impact of the TMT bubble on beta calculations in some sectors is all too obvious, first leading to decline and then, in the past several months, to recovery. ·
The model
does not appear to adequately explain the variation in stock returns.
Empirical studies done in the past 15 years show that low beta stocks may
offer higher returns. ·
What is
the Market portfolio? Does it include the bond market? Real estate?
Commodities? Private placements? ·
The Market
portfolio, and hence its return, are not observable and have to be estimated.
·
The model
assumes that all investors are risk adverse. Some investors (e.g., some day
traders), are not risk adverse. ·
The model
assumes that all investors create mean-variance optimized portfolios. There
are many investors who don't know what a mean-variance optimized portfolio
is. 8. In
each of these companies, there has not been any significant change in the
business fundamentals to warrant the magnitude of the price spurt. Bonus
offers and stock splits are wealth-neutral. Immediate gains may also be
transitory. Such corporate actions can have a sustained positive effect on
valuation, which may, however, be reflected only over a longer time frame.
The enhanced number of shares may lead to higher liquidity in the stock. This
may lead to a higher price-earnings multiple (PEM). The likelihood of a
higher PEM will also be valid only if the earnings growth story does not lose
momentum Bonus issues also show that companies are taking recourse to an
internal source of finance by capitalising free reserves. This route also
pleases shareholders however, immediate and sudden price rise cannot be
justified. 9. There are several reasons companies may
consider this corporate action. There are plenty of arguments over
whether a stock split is an advantage or disadvantage to investors. One side
says a stock split is a good buying indicator, signaling that the company's
share price is increasing and therefore doing very well. This may be true,
but on the other hand, you can't get around the fact that a stock split has
no affect on the fundamental value of the stock and therefore poses no real
advantage to investors. Caselet 310. Fundamental analysis is based on an analysis of the overall health of a company and its potential to earn profits in future. This analysis also involves a study of the industry in which the company operates and the economy as a whole. Technical analysis, in contrast, is based on study of the price trends studies made on these two styles of investing in the US have shown that each of these worked very well but in different periods. Each of the two approaches also has its defects. The biggest defect of financial analysis is that it is mechanical and does not consider the qualitative factors, while fundamental analysis contains analysis of some qualitative factors, the significance of which is difficult to objectively estimate. Similarly, it is said that technical analysis becomes a self-fulfilling prophecy when every one in the market applies the same technique, while fundamental analysts face the problem of availability of the required information at a suitable time. In sum, it can be said that both the types of analysis have their strengths and weaknesses, a middle of the road approach could be to use fundamental analysis to select stocks and also depend on technical analysis to time the market. 11. A typical head and shoulders pattern looks like the one given in the graph below. The shoulders are marked as S1 and S2 and the head as H. The lowest points reached between S1 and H and between H and S2 are marked as L1 and L2 respectively.
When the price reaches S1, the sellers feels the stock in overpriced and start selling and the price falls. At L1, the buyers feel the stock is underpriced and start buying thereby pushing up the price to a level higher than the earlier peak but again, the sellers feel the stock is overpriced and start selling to bring it back to the earlier level, which is indicated as L2 for the second time, the buyers take over and push the prices up. But, this time round, they are not very powerful and therefore before the price reaches the earlier peak (H), the sellers overpower them and, they bring the price below the levels touched earlier low levels is what completes this formation. |
< Z < 
= 1.375 , 
= 16.75
= 
=
= 12.87 , 
= 26
= 
=
