ncfm trainning - cm chapter 6

8/14/2019 NCFM Trainning - CM Chapter 6

1/29

Concepts

TimeValueofMoney

n erstan ng nanc a tatements

EquityResearch


2/29

Elementar Statistical Conce ts

Geometric Mean

Xi / N, where i =1,2,3n (1+r1)* (1+r2)* (1+r3)* .(1+xn)n

ar ance an ar ev a on

2 = [ (Pi * (xi X)2 ) ] Positive sq root of variance,

Coefficient of Variation Covariance

( / X) * 100 Cov (x,y) = { (Xi X) (Yi Y) } / N

Correlation coefficient Normal Distribution

= *

, x yx


3/29

What is the average rate of return of XYZ if the returns during the

,

Average Return = (20% + 25% + 45%) / 3

= 35%

Correct answer is 30%

What is the expected return of XYZ if it has the probability of

Probability (%) Return(%)

20 10

30 12

50 15

(Since probability is assumed as a percentage, no need to divide by N)

Expected return = { (20%*10%) + (30%*12%) + (50%*15%) }

= 1300

= 13.10%


4/29

What is the annual percentage rate of increase in security prices

,

Annual rate of increase = (1.16)* (1.08)* (1.05)3

= 1.0956

three variables= 9.56%

Type 0.333 (i.e., 1/3

[since we want to find

the cube root)]; then

press =

Click here


5/29

The return on the security A can be either 15% with 60% probability

.

2 = [ (Pi * (xi X)2 ) ]

= (0.15*0.60)+(0.14*0.40) = 0.146 = 14.60%

Thereforethevarianceisgivenby

2 ={ [ 0.60 * (15% - 14.60%)2 ] + [ 0.40 * (14%-14.60%)2 ] }

={ [ 0.60 * (0.4)2 ] + [ 0.40 * (-0.6)2 ] }={ [ 0.096 ] + [ 0.144 ] }

= 0.24 or 24%

Varianceofthestockis24%


6/29

Which amongst the following portfolios (A,B,C) are the most

preferred and most riskyPortfolio Return (%) Standard deviation (%)

A 15 12

Coefficient of variation

= (12/15)*100 = 80

B 10 9C 14 7

= (9/10)*100 = 90= (7/14)*100 = 50

Therefore Portfolio B is more risky whereas

portfolio C is the most preferred


7/29

A stock is at Rs. 800 on day 1. The total risk of the stock is 2% per

day. What range of prices would be observed on day 2 with 99%probability ?

For99%probabilitythestockpricecanliebetween+ 3 fromthe

+ 3- 3

800 (3 * 2% * 800) 800 + (3 * 2% * 800)

800 + 48-

752 848

Hence the price will vary between Rs 752 to Rs 848 on the next day.


8/29

Time Value of Mone

Future value of a single cash flow FV = PV (1+r)t

Present value of an single cash flow PV = FV

(1+r)t

Future value of an Annuity FV = CF {(1+r) - 1 }t

r

Present value of an Annuity


9/29

Calculate the value 4 years hence of a deposit of Rs. 2000 made today if

the interest rate is 15% by discrete and continuous compounding

By discrete compounding

FV = 2000 * (1+0.15)4 = 2000 * (1.749) = Rs. 3498

y con nuous compoun ng

FV = 2000 * e(0.15 * 4) = 2000 * e(0.6) = 2000 * 1.822 = Rs. 3644.23

Select Inv

Multiply by 2000

and press =


10/29

How much does a deposit of Rs. 3000 grow to at the end of 3 years, if

the nominal rate of interest is 15% and compounding is done quarterly ?

Future value = 3000 * [ (1 + 0.15/4)(4*3)

]

. .


11/29

Suppose, you deposit Rs 1000 annually at the year end in a bank for

5 years and your deposit earn a compound interest rate of 15%. What

w e e va ue o your nves men a er years

= 1000 [ { (1 + 0.15)5 1 } / 0.15 ]

.

= Rs. 6742.3

If compounding is continuous then what ?

= 1000 [ ( e0.15*5 1 ) / 0.15 ]

.

= Rs. 7446.6


12/29

What is the present value of Rs. 50000 receivable after 4 years at a

discount rate of 12% ?

PV = 50000 / (1 + 0.12)4

= 50000 / ( 1.5735 )= Rs. 31775.9

If discounting is continuous then what ?

Present value = 50000 / [( e(0.12*4)]

= Rs. 30939.16

= 50000 / 1.616


13/29

UnderstandingFinancialStatementsBalanceSheetBalanceSheetshowsthefinancialpositionofabusinessfirmataparticularpointoftime.


14/29

UnderstandingFinancialStatementsProfit&LossaccountProfit&Loss(abbreviatedtoP&L)Account/IncomeStatementreportstherevenuesand

expensesofafirmofanaccountingperiod.


15/29

Understanding Financial StatementsComparativeFinancialStatementsFinancialstatementswhichfollowaconsistentformatbutwhichcoverdifferentperiods

oftime.

Common Size Statements

Acompanyfinancialstatementthatdisplaysallitemsas percentagesofacommonbase

figure.Thistypeoffinancialstatementallowsforeasyanalysisbetweencompanies or

between timeperiodsofa company.


16/29

RatioAnalysisEarningspershare

Theportionofacompany'sprofitallocatedtoeachoutstandingshareofcommon

stock.EPSservesasanindicatorof acompany'sprofitability.

EPS=(NetIncome+DividendonPreferredStock)/AverageofOutstandingShares.DividendYield

Afinancialratiothat showshowmuchacom an a soutindividendseach ear

relativetoitsshareprice. Intheabsenceofanycapitalgains,thedividendyieldisthe

returnoninvestmentfora stock.

=AnnualDividendPerYear/PricePerSharePricetoearningsratio

Avaluationratioofacompany'scurrentsharepricecomparedtoitspershare

.

=MarketValuePerShare/EarningPerShare(EPS)Returnonequity

Ameasureofacorporation'sprofitabilitythatrevealshowmuch profitacompany

generates withthemoneyshareholdershaveinvested.

=NetIncome/ShareholdersEquity


17/29

RatioAnalysis

Debtto

equity

ratio

Ameasureofacompany'sfinancialleveragecalculatedbydividing itstotal

liabilities by stockholders'equity.Itindicateswhatproportionofequityanddebtthe

companyisusingtofinanceitsassets.

=Total

Liabilities

/Shareholders

Equity

Ratiosforshorttermcreditors1. CurrentRatio

Anindicationofacompany'sabilitytomeetshorttermdebtobligations;the

higher theratio,themoreliquidthecompanyis.

=CurrentAssets/CurrentLiabilities2. AcidTestRatio

ACIDTESTRATIOisastringenttestthatindicates whetherafirmhasenough

.

= (Cash+AccountsReceivable+ShorttermInvestments)CurrentLiabilities


18/29

RatioAnal sis

INVENTORYTURNOVERRATIO = CostofGoodsSold/Inventory.AVERAGECOLLECTIONPERIOD = Receivables/Avg.SalesperDayFIXEDASSETSTURNOVERRATIO = NetSales/FixedSales.GROSSPROFITRATIO = GrossProfit/NetSalesNETPROFITRATIO = NetProfit/NetSales.


19/29

EquityResearch Bhav Co Database

NSEandBSEpublishthebhavcopiesontheresiteseveryday.

Bhavcopyliststhepricesofsharesfortheday.Foreveryscripbhavcopy

containsfourpricesviz.open,high,lowandclosealongwiththevolume.

IndexDatabaseAdatabaseindexisadatastructurethatimprovesthespeedofoperations

onadatabasetable

OrderbooksnapshotDatabaseShownnext.

TradesDatabaseShownNext.


20/29

Order Book Sna shot


21/29

Trades Database


22/29

literature


23/29


24/29


25/29


26/29


27/29


28/29


29/29

ncfm trainning - cm chapter 6

Documents