Questions and Answers
What is the primary purpose of conducting valuations in business?
A rights issue allows existing shareholders to purchase additional shares at a discount.
True
What does 'beta' represent in the context of market risk?
Market volatility or sensitivity to market movements
The __________ model is commonly used for business valuation based on projected future cash flows.
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Match the following corporate actions with their descriptions:
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What is a primary factor considered in the Capital Asset Pricing Model (CAPM)?
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Stock consolidation results in a lower number of shares outstanding, increasing earnings per share.
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Name one common risk associated with investments.
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A __________ issue allows shareholders to maintain their ownership percentage when new shares are issued.
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Which valuation method compares a company's value to its competitors?
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What type of information is collected from government statistics and data provided by the central bank?
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Research Analysts only consider qualitative factors while making investment decisions.
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What is the primary function of a Sell-side Analyst?
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Research Analysts collect company-specific information from various sources including financial statements/Annual reports filed by the companies as part of _______________ requirements.
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Match the following types of information with their sources:
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What do Research Analysts spend a lot of time doing?
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Research Analysts only consider quantitative factors while making investment decisions.
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What is the main objective of a Research Analyst?
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What is a key advantage of issuing convertible debentures for the issuer?
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Holders of convertible debentures only receive coupon payments and no potential equity conversion.
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What happens to existing shareholders when new shares are issued upon conversion of convertible debentures?
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Depository receipts represent shares of a __________ company.
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Match the following types of deposits with their designations:
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Which of these is a disadvantage of convertible debentures for the existing shareholders?
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A depositary receipt is issued against equity shares placed in a bank's custodian account.
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What is a common financial benefit for investors of convertible debentures?
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Study Notes
Convertible Debentures
- Convertible debentures are often offered at a discount to the market price.
- These debentures can be partially convertible, where only a portion is converted into equity shares.
- Advantages include lower coupon rates compared to pure debt instruments, benefiting issuers due to less immediate debt repayment obligation.
- Investors benefit from both coupon payments and potential capital appreciation upon conversion to equity.
- A downside includes shareholder dilution when new shares are issued, reducing existing shareholders' proportionate ownership.
Depository Receipts
- Depository receipts (DRs) represent shares of a foreign company and trade in local markets in local currency.
- The issuance process involves delivering shares to a bank, which then holds them in a custodian account and issues certificates (DRs) to investors.
- Types of DRs include Indian Depository Receipts (IDRs), Global Depository Receipts (GDRs), and American Depository Receipts (ADRs).
Corporate Actions
- Corporate actions include various strategies like dividends, rights issues, bonuses, stock splits, mergers and acquisitions, and more.
- Specific actions impact the shareholder structure and corporate strategy, influencing stock price and investor sentiment.
Valuation Principles
- Pricing and valuation differ; valuations help in understanding a business's worth.
- Valuation sources include earnings and assets, with methods comprising discounted cash flow (DCF) and relative valuation approaches.
- Importance of understanding new valuation parameters in modern economies, including CAPM and subjective characteristics affecting valuations.
Risk and Return Fundamentals
- Investment returns are measured through various calculations like simple, annualized, and compounded returns.
- Risks must be measured, considering market risk (beta) and sensitivity analyses.
- Concepts such as the margin of safety and liquidity of equity shares are critical for investors’ decision-making processes.
Research Reports
- Good research reports should embody clarity, objectivity, and comprehensive analysis of financial data.
- Analysts must be adept at collecting and interpreting macroeconomic, industry-specific, and company-specific information for effective evaluations.
Regulatory Environment
- Regulatory infrastructure shapes the functioning of financial markets, with specific regulations governing operations within the Indian securities market.
- Understanding codes of conduct and mechanisms for conflicts of interest is essential for research analysts to maintain professional integrity.
Research Analysis Methodology
- Research analysts rely heavily on gathering qualitative and quantitative data to assess operational performances and financial health of companies.
- They must balance hard data with qualitative insights to provide recommendations on stock options.
- Analysts are categorized as sell-side or buy-side, with differing roles in research dissemination and investment strategies.
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Description
This quiz covers the basics of convertible debentures, including their market price, conversion into equity shares, and advantages to the issuer. It also touches on the lower coupon rate and yield to the investor.
