DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

END TERM EXAMINATIONS, AUTUMN 2019-20

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT (BM 673)
INSTRUCTIONS
1 ALL QUESTIONS ARE COMPULSORY
2 ANSWERS ARE TO BE MARKED IN THE SEPARATE MCQ ANSWER SHEET
PROVIDED FOR THIS PURPOSE
3 EXAMINEES SHALL NOT CARRY THIS QUESTION PAPER OUTSIDE THE
EXAM HALL BEFORE SUBMITTING THE ANSWER SHEET
4 USE ANNUAL COMPOUNDING UNLESS OTHERWISE EXPLICTLY
MENTIONED
5. DO ALL CALCULATIONS UPTO 4 PLACES OF DECIMALS AT LEAST
QUESTIONS
1 An investor W had purchased an annual coupon bond of the face value of
Rs 1,000 one year ago (t=0). At that time, the bond had three years to
maturity. It was to make three coupon payments at the end of one, two
and three years from then. The redemption was to be at the end of three
years (t=3) at a premium of 20% above face value. The bond was selling
at a ytm of 15% when it was purchased by W i.e. at t=0. The bond has just
made its first coupon payment and is now quoting at a ytm of 12% (t=1
year). The coupon rate of the bond is 12% p.a. If W decides to sell the
bond now (t=1 year), then the yield (in %) that will be earned by him over
his one-year investment period (t=0 to t=1 year) is closest to:

(A) 20.03 (B) 20.10 (C) 20.68 (D) 20.47 (E) 21.08 (F) 20.82
(G) 20.36 (H) 20.98 (I) 20.61 (J) 19.96

2 A two-year annual coupon bond is quoting at a YTM (yield to maturity) of

15% p.a. Redemption will be at the end of the second year. at a discount
of 20% below its face value. The coupon rate of the bond is 15% p.a. The
bond’s Macaulay’s duration (in years) is closest to:

(A) 1.8580 (B) 1.8222 (C) 1.8936 (D) 1.8886 (E) 1.7976 (F) 1.9166
(G) 1.8696 (H) 1.5848 (I) 1.8270 (J) 1.8463

3 On the basis of the figure of duration arrived at in Q No 2 only, the price

change (in %) corresponding to a 2% increase in the ytm from 15% p.a. is
closest to:
 (A) (-) 2.76 (B) (-) 3.17 (C) (-) 3.21 (D) (-) 3.29 (E) (-) 3.15 (F) (-) 3.48
(G) (-) 3.31 (H) (-) 2.85 (I) (-) 3.38 (J) (-) 3.25

4 Today is April 1, 2019. XYZ Ltd. has just declared a dividend of Rs 2.40 per
equity share (of face value Rs 10/- each) for the year 2018-19 from an EPS
of Rs 3.00. This is its first year of operations. The shares are fully paid. The
current market price per share of XYZ Ltd. is Rs 65.00. The company plans
to finance its future investments from retained earnings only. Its payout
ratio and return on net worth are expected to remain the same over the
foreseeable future. Assuming that the current market price reflects the
intrinsic value per share for XYZ Ltd., the return required by equity
shareholders of XYZ Ltd. (in %) is closest to:

(A) 9.73 (B) 10.09 (C) 9.88 (D) 10.11 (E) 10.16 (F) 9.56
(G) 9.70 (H) 9.41 (I) 9.38 (J) 9.68

5 A Ltd. is intending to acquire B Ltd. (by merger). The following

information is available in respect of the two companies:
Particulars A Ltd. B Ltd.
No. of Equity Shares 5,00,000 3,00,000
Market Price per share (Rs) 18 12
Current P/E Ratio 4.50 5.00
The proposed merger will take place by the issue of additional shares of A
Ltd. to all the shareholders of B Ltd. There would be a 20% increase in
aggregate earnings after tax due to synergy. The shareholders of A Ltd.
expect the P/E ratio after the merger to be 5.00. They also desire a 50%
rise in the share price of the merged entity over the present price of the
shares of A Ltd. The exchange ratio expressed as the number of shares of
B Ltd. per share of A Ltd. meeting these requirements must be closest to:

(A) 3.03 (B) 2.25 (C) 3.50 (D) 2.60 (E) 3.86 (F) 4.02
(G) 3.10 (H) 2.87 (I) 3.41 (J) 3.53

6 Two securities A & B have the coordinates A(6,12) & B(12,20) in risk-
return (σ,E(R)) space. The correlation coefficient between their returns is
 +1.00. The composition of the risk free portfolio consisting of A & B (X A:XB)
is:

(A) 2:(-)1 (B) 3:(-)2 (C) 2/3:1/3 (D) (-) 2:3 (E) 4/7:3/7
(F) 3/5:2/5 (G) (-) 3:4 (H) 4:(-)3 (I) (-) 1:2 (J) None of these

7 Two securities A & B have the coordinates A(6,12) & B(12,20) in risk-
return (σ,E(R)) space. The correlation coefficient between their returns is
(-)1.00. The return (in %) on the risk free portfolio consisting of A & B is:

(A) 15.20 (B) 15.86 (C) 15.05 (D) 16.75 (E) 14.00 (F)15.43
(G) 14.45 (H) 14.85 (I) 14.67 (J) 15.64

8 Two independent securities A & B have the coordinates A(6,12) &

B(12,20) in risk-return (σ,E(R)) space. The expected return (in %) on the
minimum variance portfolio M of these two securities in the same space
are closest to:

(A) 14.88 (B) 15.35 (C) 13.40 (D)13.60 (E)14.56 (F)13.95

(G) 15.09 (H) 12.83 (I) 14.24 (J) 13.35

9 The minimum variance portfolio of A & B constituted in Q No 8 is M. A

portfolio W with an expected return of 30% p.a. is designed consisting of
M together with riskfree lending/borrowing @ 9.00% per annum. The
amount of riskless lending/borrowing per Rupee of total investment is
closest to ((-) indicates borrowing):

(A) (-)3.34 (B) (-)3.57 (C) (-)3.80 (D) (-)3.89 (E) 3.51 (F) 0.63

(G) 2.49 (H) 0.36 (I) (-)2.57 (J) (-)2.38

10 You are given the following information in respect of the stock of PQR
Ltd.:
Equity risk premium: 10% p.a.
2
Covariance (Ri,Rm): 125%
Standard Deviation of market returns: 75 %
Riskfree rate: 5.50% p.a.
 The expected return on the security (in %) as per CAPM is closest to:

(A) 22.23 (B) 21.67 (C) 22.29 (D) 21.87 (E) 22.17 (F) 21.33
(G) 22.25 (H) 21.09 (I) 22.67 (J) 21.17

11 Two independent securities A & B have the coordinates A(6,12) &

B(12,20) in risk-return (σ,E(R)) space. No riskfree lending and borrowing is
allowed. However, long/short positions in A & B are allowed. An efficient
portfolio W is constructed consisting of A and B with a standard deviation
of 15%. The content of A in Rupees per Rupee of total investment is
closest to:

(A) (-) 0.35 (B) (-) 0.67 (C) (-) 0.60 (D) (-) 0.12 (E) (-)0.46 (F)0.48
(G) 0.25 (H) (-)0.24 (I) (-) 0.33 (J) 0.42

12 Two independent securities A & B have the coordinates A(6,12) &

B(12,20) in risk-return (σ,E(R)) space. Riskfree lending and borrowing is
allowed @ 9.00% p.a. However, no short positions in A & B are allowed.
An efficient portfolio W is constructed with a standard deviation of 15%.
The expected return of W (in %) is closest to:

(A) 23.40 (B) 22.75 (C)25.60 (D)22.50 (E)22.80 (F)25.75

(G) 24.75 (H) 25.55 (I) 25.50 (J) None of these

13 Two independent securities A & B have the coordinates A(6,12) &

B(12,20) in risk-return (σ,E(R)) space. Riskfree lending and borrowing is
allowed @ 9.00% p.a. Long & short positions in A & B are both allowed.
An efficient portfolio W is constructed with a standard deviation of 15%.
The expected return (in %) of W is closest to:

(A) 24.23 (B) 25.62 (C) 26.56 (D) 26.87 (E) 24.36 (F) 24.66
(G) 25.52 (H) 26.09 (I) 25.82 (J) 26.02

14 Two independent securities A & B have the coordinates A(6,12) &

B(12,20) in risk-return (σ,E(R)) space. Riskfree lending and borrowing is
allowed @ 9.00% p.a. Long & short positions in A & B are both allowed.
An efficient portfolio W is constructed with a standard deviation of 15%.
The content of B in Rupees per Rupee of investment in W is closest to:
 (A) 1.23 (B) 1.67 (C) 1.56 (D) 0.95 (E) 1.59 (F)1.41
(G) 1.02 (H) 0.98 (I) 1.10 (J) 1.21

15 You are given three securities A, B and C whose coordinates in risk-return

(σ, E(R)) space are A(6,14), B(3,8) and C(15,20). The respective correlation
coefficients are: ϱAB = 0.50, ϱBC = 0.40 and ϱCA = 0.20. Long & short
positions in these securities as well as riskfree lending/borrowing @
5.00% p.a. are permitted. You solve the portfolio optimization equations
Zi
Xi  E  RP   RF
Ri  RF  Z i   Z j ij
i
2
Zj Z
P
j i
, j
for maximization of slope
and obtain XA= 14/18; XB= 1/18; XC= 3/18 for the tangency portfolio T. The
variance and expected return of this tangency portfolio are: σ T2 =203/6; RT
= 44/3. An investor approaches you to design a portfolio W for him with a
standard deviation of 5.5%. The content (by value) of security B in this
optimal portfolio W per 100 Rs of total investment is closest to:

(A) 5.25 (B) 6.01 (C) 3.90 (D) 4.02 (E) 4.75 (F) 5.65
(G) 4.05 (H) 4.30 (I) 5.60 (J) 4.80

16 Let us work in the CAPM framework. At t=0, the broad based stock index
M (that is representative of the market) is at 38,000 and is expected to
scale 41,800 at t=6 months from now. The 6-month T-bills (representative
of the riskfree rate) are quoting at 97.00. The beta of your portfolio W
valued at Rs 10.00 million is expected to be 1.30 over the next 6 months.
The expected value of your portfolio (Rs in million) at t=6 months is
closest to (use money market conventions based calculations throughout
with 12 months = 1 year and no compounding):

(A) 11.28 (B) 11.07 (C) 11.36 (D)11.17 (E) 11.09 (F) 11.41
(G) 11.21 (H)11.80 (I) 10.95 (J) 11.31

17 An investor X expects to hold a security for its remaining life of two years.
The security will yield equal coupon flows of Rs 5,000 at the end of each
year over its two-year lifespan. it will be redeemed for Rs 20,000 at the
end of two years. The YTM works out to 30% p.a. Keeping in view its risk
profile, the investor desires a return of 22% from the security. The net
 present value of the investment to X based on its current price (in Rs) is
closest to:

(A) 2,889 (B) 2,572 (C) 2,532 (D) 2,256 (E)2,191 (F) 2,802
(G) 2,566 (H) 2,810 (I) 2,353 (J) 2,610
18 Today is April 1, 2019. PQR Ltd. projects its sales for the financial year
2019-20 to be Rs 180 million. Its variable expenses are projected at 48% of
its sales and its fixed cash expenses (excluding interest) at Rs 10 million. It
has a 12% debt of Rs 50 million outstanding at the beginning of the year
on which it will pay interest of Rs 6 million for the year. Its tax rate is 30%.
A further debt issue of Rs 3 million shall be made in the year. Preference
dividend of Rs 0.3 million will be paid for the year. Further, preference
shares of Rs 1 million shall be redeemed at face value in the year. Capital
expenditure for the year (to be incurred at the end of the year) is Rs 8
million. Working capital requirements have stabilized and are not likely to
change during the year from the figure of Rs 5 million. Depreciation and
amortizations work out to Rs 10 million. The free cash flow (from the
firm’s equity shareholders’ point of view) for the year (in million Rs) is:

(A) 51.20 (B) 43.52 (C) 46.96 (D) 48.48 (E) 48.24 (F) 40.44
(G) 50.80 (H) 45.96 (I) 48.44 (J) None of these

19 The present (t=0) capital employed of XYZ Ltd comprises of the following
(Rs in millions): Equity Capital (40,000 fully paid equity shares):40.00;
Reserves: 60.00; 12% Debt: 50.00. The firm is presently earning at an
average rate of 20% on entire capital employed. It, now, proposes it
expand its operations by adding a new product line at an additional cost
of Rs 20.00 million to be financed by 15% debt of Rs 10.00 million and the
issue of 5,000 fully paid equity shares. This additional investment will
generate EBIT at the same rate as existing funds. The tax rate is 50% and
the projected P/E ratio is 8.00. The projected price (in Rs) per share at the
end of the first year after implementation of the project is likely to be
closest to:

(A) 2,340 (B) 2,355 (C) 2,376 (D) 2,334 (E) 2,402 (F) 2,328
(G) 2,298 (H) 2,396 (I) 2,364 (J) 2,342
20 The expected return on the market portfolio is 20% p.a. with a standard
deviation of 10%. The riskfree rate is 4.50% p.a. A CAPM efficient
portfolio W has a standard deviation of 28%. The current market value of
W is Rs 10,000. Its expected market value one year from now (in Rs) is
closest to:
(A) 15,200 (B) 15,100 (C) 14,800 (D) 14,810 (E) 14,790 (F) 15,125
(G) 15,480 (H) 14,120 (I) 12,275 (J) None of these