ICFAI University, MBA, Introduction to Security Analysis (MB3G1F) Exam Papers

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1. Which of the following statements is/are false with respect to the Price to Book Value (P/BV) ratio?
I. P/BV ratio can be calculated even for firms with negative earnings.
II. If a firm has continuous negative earnings, the book value of equity can become negative leading to a
negative P/BV ratio.
III. When the required rate of return increases, the P/BV ratio goes up.
(a) Only (I) above
(b) Only (III) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above.

2. If a vertical rally or a decline is interrupted by a consolidation pattern akin to a rectangle, such a formation is
called
(a) Saucers and Rounding Tops
(b) Double Tops and Bottoms
(c) Head and Shoulders
(d) Gaps
(e) Flags.

3. The market rate of interest on 2-year bond is 8.63% while the rate on one year bond is 8.21%. The forward rate
on a one year bond, one year from now is 8.45%. Assuming pure expectations theory holds good, the liquidity
premium to induce investors to hold the 2 year bond is
(a) 0.30%
(b) 0.46%
(c) 0.52%
(d) 0.61%
(e) 0.74%.

4. Which of the following statements is false with respect to the forward contracts?
(a) Terms are structured to suit both the contracting parties
(b) Traders have no compulsion to deposit initial margin irrespective of their trading positions
(c) No organization guarantees the performance of the counterparty
(d) Traders have to pay daily settlement margin depending on the movement in the price
of the underlying stock
(e) It is an over-the-counter product.

5. Which of the following reduces assets and stockholder’s equity?
(a) Stock splits
(b) Cash dividends
(c) Stock dividends
(d) Reverse stock splits
(e) Bonus issues.

6. Which of the following principles is true while analyzing trend line penetrations?
(a) The lesser the number of peaks/troughs that touch a trendline, the greater is its significance
(b) The breadth of a trendline indicates whether a penetration is significant or not
(c) A steep trendline is easily violated by small sideward movements in the price chart and is not particularly
useful in identifying reversals
(d) Penetration of a steep trendline results in a corrective movement after which the new trend starts
(e) When the peaks of rallies reach the trend line and then return with penetration, the recurrence of this
tendency indicates that the trend “obeys” the trendline.

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7. Swagat Housing Ltd. has a project of constructing a Multiplex in Hyderabad. The project is financed by 35%
equity and the remaining from issuance of bonds bearing a coupon rate of 7.5% p.a. maturing in 7 years. The
required rate of return for equity holders is 20%. If a sinking fund is established to redeem the bonds, the
capitalization rate is
(a) 12.51%
(b) 13.49%
(c) 14.26%
(d) 15.78%
(e) 19.27%.

8. Which of the following statements is/are true with respect to the “market extraction method” to derive the
capitalization rate of real assets?
I. In this method, net operating income is divided by market value to get the capitalization rate.
II. In this method, the rates on equity as well as debt financing rates are weighted according to their
proportions to calculate the capitalization rate.
III. In this method, the capitalization rate is the sum of the return required on an asset for its being non-liquid,
and the risk free rate.
IV. In this method, a comparable property is selected to choose a rate which reflects market sentiments.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (IV) above
(e) Both (III) and (IV) above.

9. Mr. Suman Sen, an employee of Taurus Ltd., was not able to earn profit from the information he had about the
likely profit figure for the company, even after trying for an extended period of time. This means that the market
is exhibiting
(a) Weak form of market efficiency
(b) Semistrong form of market efficiency
(c) Super strong form of market efficiency
(d) Near strong form of market efficiency
(e) Inefficiency.

10.Which of the following statements is false with respect to Head and Shoulders price pattern?
(a) Volume is low at the left shoulder and continues to rise, albeit at a lower rate at the head
(b) The left shoulder signifies the penultimate rally in the bull market
(c) Neckline is a line that joins the points from where the final rally begins and ends
(d) The right shoulder confirms the beginning of a bear market
(e) Head and shoulders pattern occurring at market bottoms is called inverted head and shoulder.

11.Consider the following information:
Stock Return (%) Variance (%)2 Weight in the portfolio
Arvind Ltd. 12 361 0.55
Dabur Ltd. 10 225 0.45
If the variance of the returns of portfolio is 180 (%)2, the coefficient of correlation between the stocks return is
(a) –0.2527
(b) –0.1642
(c) +0.1788
(d) +0.2145
(e) +0.2314.

12.Which of the following is a natural entry barrier?
(a) Control over raw material
(b) Licensing policy of government
(c) Control over technology
(d) Economies of scale
(e) Control over market through strong brand equity.

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13.Which of the following statements is/are true of growth industries?
I. They are considered to be most likely to benefit from a period of economic prosperity and most likely to
suffer from a period of economic slowdown.
II. They are least hurt in periods of economic slowdown.
III. During economic slowdown their earnings might very well expand while the earnings of other industries
decline.
IV. They are generally characterized by expectation of abnormal returns, often independent of business cycle.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Only (IV) above
(e) Both (III) and (IV) above.

14.The cash earning per share of Mithun Industries Ltd. is Rs.15 and the sales of the company is Rs.540 lakhs. The
depreciation provided by the company is Rs.50 lakhs. If the company has 10 lakhs shares outstanding, the net
profit margin of the company is
(a) 18.52%
(b) 27.12%
(c) 32.41%
(d) 41.77%
(e) 50.07%.

15.The following are the areas where significant diversities are observed with respect to the accounting policies,
except
(a) Valuation of fixed assets
(b) Valuation of inventories
(c) Treatment of gratuity liability
(d) Treatment of capital
(e) Treatment of Research and Development expenditure.

16.Which of the following is/are the applications of ex-ante SML?
I. Test of asset pricing theories.
II. Test of market efficiency.
III. Evaluating the performance of a portfolio manager.
IV. Identifying undervalued securities.
(a) Only (IV) above
(b) Both (II) and (III) above
(c) Both (II) and (IV) above
(d) (I), (II) and (III) above
(e) (II), (III) and (IV) above.

17.Which of the following statements is not true?
(a) Economic Value Added (EVA) is primarily used for evaluating the performance of management
(b) EVA serves as a proxy for measuring a stock’s performance
(c) EVA cannot be applied to calculate NPV
(d) Market Value Added (MVA) serves as a measure of a firm’s external performance
(e) MVA can be computed by discounting the EVA of each year by the WACC.

18.Amazon Inc. recently issued 15-year bonds. The bonds have a coupon rate of 7.5 percent and pays interest semiannually.
The bonds are callable in 5 years at a call price equal to 13 percent premium to par value. The par value
of the bonds is Rs. 1,000. If the yield to maturity is 6 percent, yield to call is
(a) 3.45%
(b) 4.21%
(c) 5.07%
(d) 6.28%
(e) 7.34%.


19.The beta of stock A is 2.0 and is currently in equilibrium. The required return on the stock is 12% and the
expected return on the market is 10%. Suddenly due to changes in the economic conditions, the expected return
on the market increases to 12%. Other things remaining the same, what would be new required return on the
stock?
(a) 15.0%
(b) 16.0%
(c) 18.5%
(d) 20.0%
(e) 22.0%.

20.Which of the following is a purpose for the construction of stock indices?
(a) The growth in the primary market volumes can be measured through the movement of index
(b) Indices help in finding the quantum of FII investments
(c) Indices help in deciding on the allocation of resources between productive and non-productive lines of
activities
(d) The changes in share prices across the market can be estimated through the movement of indices
(e) An index helps in finding the gain/loss from investment in a particular share.

21.The required rate of return of a company is 18%. It has paid a dividend of Rs.3.50 for the last year. If the stock is
currently trading at its intrinsic value of Rs.65.50, the growth rate in dividend is
(a) 11.32%
(b) 12.01%
(c) 13.61%
(d) 14.55%
(e) 15.79%.

22.Which of the following statements is not true with respect to the mutual funds?
(a) Net Asset Value (NAV) represents the fair value of a unit of a mutual fund scheme
(b) The units of closed-ended funds are generally not redeemable at their NAV
(c) The NAV and the price at which the units of mutual funds are traded in secondary market are not the
same
(d) Open-ended mutual fund companies buy and sell units at their NAV
(e) Closed-ended funds channelize funds in secondary market in acquisition of corporate securities.

23.An option writer writes a 6-month naked call option on a stock at a premium of Rs.13 and the strike price of
Rs.225. The prevailing market price of the stock is Rs.210. If on the expiration day the price of the stock is
Rs.220, then the profit/loss to the option writer will be
(a) − Rs.10
(b) Rs. 3
(c) Rs. 7
(d) Rs.10
(e) Rs.13.

24.Following data pertaining to Vaibhav Ltd. are given below:
Day Closing price (Rs.) 100 EMA for previous day (Rs.)
1 75.00 71.00
2 78.00 72.50
3 84.00 73.00
The 100 day EMA for day 3 is
(a) Rs. 52.58
(b) Rs. 67.89
(c) Rs. 73.22
(d) Rs. 81.05
(e) Rs. 96.41.

25.Which of the following is true with respect to realized yield?
(a) The realized yield cannot be used to estimate rates of return attainable from various trading strategies
(b) A low realized yield reflects an investor’s expectation of substantial capital gains in a fairly short
period of time
(c) The realized yield depends only on the holding period chosen
(d) The realized yield will always lie between the YTM and the reinvestment rate
(e) For bonds with shorter term to maturity, realized yield will be closer to reinvestment rate.


26.Given below is the data of two similar residential properties:
Property
Sales price
(Rs.)
Gross annual income
(Rs.)
A 25,00,000 1,20,000
B 22,50,000 1,05,000
If the gross annual income of property ‘C’, which is similar in characteristics to the above two properties is
Rs.1,15,000, the indicated market value of property ‘C’ as per gross income multiplier method is
(a) Rs.23,35,500
(b) Rs.24,00,000
(c) Rs.24,29,950
(d) Rs.25,19,350
(e) Rs.26,00,000.

27.Which of the following statements is/are not true regarding the lead indicator approach?
I. It forecasts GNP in the short run.
II. It puts forward magnitude and duration of change in the economic activity.
III. The indicator should fit logically with the business cycle theory.
IV. It measures how widespread a phenomenon is.
(a) Only (I) above
(b) Both (I) and (III) above
(c) Both (II) and (III) above
(d) (I), (II) and (IV) above
(e) (II), (III) and (IV) above.

28.The duration for a bond paying semi-annual coupon is 6.72 years for a maturity of 10 years. If the YTM of the
bond is 12.5% with a coupon rate of 11% and the face value is Rs.100, the modified duration of the bond is
(a) 4.78 years
(b) 5.21 years
(c) 6.32 years
(d) 7.14 years
(e) 8.22 years.

29.Which of the following statements is/are true of the constant growth Dividend Discount Model?
I. It assumes that each future dividend is (1 + g) times greater than the prior dividend.
II. It assumes that the discount rate is greater than the growth rate.
III. It assumes that the increase in growth rate is constant over time.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (I) and (III) above.

30.Consider the following data of Omega Mutual Fund (Income plan):
(Rs. million)
Value of investments 3474.20
Receivables 260.60
Accrued income 173.60
Other current assets 521.00
Liabilities 390.86
Accrued expenses 86.80
Number of outstanding units is 200 million. Exit load applicable to this scheme is 2.5%. If the investor sells his
units, the per unit price he will get is
(a) Rs.20.2526
(b) Rs.20.1539
(c) Rs.19.7587
(d) Rs.19.3635
(e) Rs.19.2647.


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