FIN630 Midterm Past Paper 7

FIN630(Investment analysis and portfolio Management) MID Term Material

Q. Explain two components of Required Rate of Return? 5marks

Answer

Required rate of return, is the sum of two components: the expected dividend yield on the stock and the expected growth rate.

Dividend Yield:

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. Dividend yield = Annual dividend / current market price per share

Growth Rate:

Most investment research deals with predicting future earnings. A future earning growth rate is unobservable. Most analysts use several methods to estimate this statistic to determine likely range for the value rather than a single number.

Q. How will you perform technical analysis in Dow Theory? 3 marks

Answer

This theory was first stated by Charles Dow in a series of columns in the WSJ between 1900 and 1902.

Primary Trend

– Called “the tide” by Dow, this is the trend that defines the long-term direction (up to several years). Others have called this a “secular” bull or bear market.

Secondary Trend

Day to day fluctuations

Little ripples between bigger waves and bigger tides. Small intraday ripple affects or small changes do not matter in the bigger scheme of affairs.

Q. Describe top-down valuation? marks 3

Answer

companies. Need to understand economic factors that affect stock prices initially. Use valuation models applied to the overall market and consider how to forecast market changes. Stock market’s likely direction is of extreme importance to investors. Should also take a global perspective because of linkages.

Q. A Company pay dividend $ 0.60. Stock price is $12. Growth rate is 2%. Required rate of return is 6%, what will be the stock value? is it overvalued or undervalued? 5 marks

Why you as invester would prefer investing in money market mutual funds(3)

Answer

Money market mutual funds invest in portfolio of money market securities. Taxable or tax-exempt. Commercial paper important investment. Average maturity limit: 90 days. Investors pay a management fee but not a sales or redemption charge (load).

Not insured by the federal government · Why it is difficult to classify industry(3) · Answer

Industries cannot be casually identified and classified. Diversified lines of business cause classification problems. Industries continue to become more mixed in their activities and less identifiable with on product or service

Difference b/w bottom approach and top down (5) Answer

With the bottom-up approach, investors focus directly on a company’s basics, or fundamentals. Analysis of such information as the company’s products, its competitive position, and its financial status leads to an estimate of the company’s earnings potential and, ultimately, its value in the, market.

Top Down

companies. Need to understand economic factors that affect stock prices initially. Use valuation models applied to the overall market and consider how to forecast market changes. Stock market’s likely direction is of extreme importance to investors. Should also take a global perspective because of linkages.

Relationship b/w Technical And Fundamental analysis (5) Answer

Fundamental analysts believe securities are priced according to fundamental economic data. Technical analysts think supply and demand factors play the most important part. We cannot ignore Technical Analysis aspect of analyzing company. Technical Analysis compliment the Fundamental Analysis. Fundamental Analysis is suitable for long term investments. Technical Analysis is suitable for short term investments.

Q31. Differentiate between income stocks and penny stocks. (5 marks)

Answer

Income Stock:

By law dividend must be paid out of the company’s earning they cannot be paid from borrowed funds. The bottom line profit a firm makes is its net income after taxes (NIAT). The firm’s board of directors may pay a dividend from the amount if they believe it to be in the shareholder’s best interest. NIAT may be retained in its entirely within the firm the entire amount may be paid out of more typically a portion of these earnings might be retained and a portion paid out. The proportion of NIAT paid as a dividend in the firm’s payout ratio. Income stocks are those that have historically paid a larger than average percentage of their NIAT as dividend to their shareholders.

Penny Stocks:

Penny stocks fall into a catch all category that refers to unusually risky specially in expensive share. Shares that sell for less than dollar 1 each would be considered penny stocks.