Finance and Valuation Quiz
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Questions and Answers

What does the P/E ratio compare?

  • Market cap to cash flow
  • Stock price to sales revenue
  • Stock price to expected earnings per share (correct)
  • Stock price to book value

    • Which variable has a negative impact on the P/E ratio?

  • Higher expected growth rate of dividends
  • Higher required rate of return on equity (correct)
  • Higher expected earnings per share
  • Lower required rate of return on equity

    • Which statement best describes the relationship between relative valuation and discounted cash flow techniques?

  • They are entirely unrelated and provide different information
  • They are complementary approaches to valuation (correct)
  • They only differ in their use of cash flows
  • One is based on historical data while the other is based on future estimates

    • What does the acronym GIGO stand for in the context of valuation?

    <p>Garbage in, garbage out</p> Signup and view all the answers

    If a company's expected growth rate of dividends increases, what happens to the P/E ratio?

    <p>It increases</p> Signup and view all the answers

    In technical analysis, what is assumed about stock prices?

    <p>They reflect all available information impacting stock performance</p> Signup and view all the answers

    What is the formula to calculate intrinsic value considering dividends?

    <p>$D_1 = D_0 imes (1+g)$</p> Signup and view all the answers

    What method do technical analysts use to evaluate stocks?

    <p>Historical price patterns and market sentiment analysis</p> Signup and view all the answers

    What distinguishes cumulative preference shares from non-cumulative preference shares?

    <p>Cumulative shares must pay unpaid dividends in the future, while non-cumulative shares do not.</p> Signup and view all the answers

    What is a key feature of participating preference shares?

    <p>They allow additional dividends based on company performance.</p> Signup and view all the answers

    Which type of shares allows shareholders to convert their shares into a specified number of equity shares?

    <p>Convertible preference shares</p> Signup and view all the answers

    What is the primary characteristic of equity shares compared to preference shares?

    <p>Equity shares provide voting rights.</p> Signup and view all the answers

    What are Differential Voting Rights (DVRs) in relation to equity shares?

    <p>They grant multiple votes or fractions of votes per share.</p> Signup and view all the answers

    Why have Differential Voting Rights (DVRs) not gained much momentum in India despite being permitted since 2000?

    <p>Shareholders have a strong preference for equal voting rights.</p> Signup and view all the answers

    Which characteristic is NOT associated with non-participating preference shares?

    <p>Holders receive additional dividends based on earnings.</p> Signup and view all the answers

    Which company was one of the first in India to issue shares with Differential Voting Rights?

    <p>Tata Motors</p> Signup and view all the answers

    What do equity investors have a residual claim on?

    <p>The assets of the company after all liabilities are paid</p> Signup and view all the answers

    Which statement accurately describes the obligations of a company to its equity investors?

    <p>The company is not obligated to make periodic payments to shareholders</p> Signup and view all the answers

    What is a major difference between equity and debt securities?

    <p>Equity investors seek capital appreciation and dividend income, whereas debt investors receive fixed interest payments</p> Signup and view all the answers

    What is commonly expected from equity investors in terms of returns compared to debt investors?

    <p>Equity investors typically expect higher returns</p> Signup and view all the answers

    Which of the following describes the voting rights of equity investors?

    <p>Equity investors with a sizable amount of shares can participate in management decisions</p> Signup and view all the answers

    What do investors seeking lower risk typically choose?

    <p>Debt investments for lower but stable returns</p> Signup and view all the answers

    Which of these options indicates a reason equity investors might not receive dividends?

    <p>The company's profitability directly influences dividend payments</p> Signup and view all the answers

    What is often a likely outcome for an investor in a volatile stock market?

    <p>Significant losses due to investor misjudgment</p> Signup and view all the answers

    Why is specialized knowledge in arts considered more crucial than in traditional financial assets?

    <p>Because of higher levels of information asymmetry and adverse selection problems.</p> Signup and view all the answers

    What is the Liberalised Remittance Scheme (LRS) primarily designed for?

    <p>To allow individuals to invest up to $250,000 abroad each year.</p> Signup and view all the answers

    What characterizes direct investments?

    <p>Investments involving purchasing securities directly from sellers.</p> Signup and view all the answers

    What is a key requirement for SEBI Registered Investment Advisers (RIAs)?

    <p>RIAs must be licensed professionals who follow a strict code of conduct.</p> Signup and view all the answers

    What primary role do Registered Investment Advisers (RIAs) play for their clients?

    <p>They help develop financial plans and assess clients' investment profiles.</p> Signup and view all the answers

    How has the role of mutual fund distributors and brokers changed since the introduction of RIA regulations?

    <p>They can no longer claim to act as investment advisers.</p> Signup and view all the answers

    What is one of the primary benefits of using an RIA for investment advice?

    <p>RIAs focus on achieving optimal investment portfolios for clients.</p> Signup and view all the answers

    What is a typical service fee structure for a Registered Investment Adviser?

    <p>RIAs are paid fees by investors for personalized investment advice.</p> Signup and view all the answers

    What is a primary function of the debt market?

    <p>To provide a platform for direct transfer of risk to lenders</p> Signup and view all the answers

    Which aspect of corporate governance is particularly important for analysts to assess?

    <p>The quality and experience of independent directors</p> Signup and view all the answers

    How does the debt market differ from the equity market in terms of risk exposure for investors?

    <p>Debt market assets are typically secured against debt</p> Signup and view all the answers

    Which of the following is NOT a component of corporate governance?

    <p>Economic growth dynamics</p> Signup and view all the answers

    Why are analysts important in promoting good governance practices?

    <p>They can highlight companies with poor governance practices</p> Signup and view all the answers

    What typically characterizes the debt market compared to the equity market?

    <p>It is more opaque and involves direct trading between institutions</p> Signup and view all the answers

    What role do independent directors play in corporate governance?

    <p>They provide objective oversight and strategic guidance</p> Signup and view all the answers

    In terms of resource allocation, how does the debt market function?

    <p>It reallocates resources from savers to higher-risk investors</p> Signup and view all the answers

    What primary purpose does a Credit Default Swap (CDS) serve for investors?

    <p>To provide insurance against company failures</p> Signup and view all the answers

    Why do small and medium firms often prefer bank borrowing over debt issuances?

    <p>Regulatory costs of debt can be prohibitive</p> Signup and view all the answers

    Which segment does NOT belong to the Indian Debt market?

    <p>Derivative securities</p> Signup and view all the answers

    What does the term 'fixed obligation' refer to in the context of bonds?

    <p>The issuer's promise to pay interest and repay principal</p> Signup and view all the answers

    Which type of bond does NOT make interest payments?

    <p>Zero Coupon Bonds</p> Signup and view all the answers

    What defines the par value of a bond?

    <p>The repayment amount at maturity</p> Signup and view all the answers

    Which type of debt instrument would a private corporation most likely issue?

    <p>Zero Coupon Bonds</p> Signup and view all the answers

    What is a key characteristic of bonds as fixed income securities?

    <p>They typically provide consistent interest payments</p> Signup and view all the answers

    Study Notes

    Investment Opportunities

    • Investments can be broadly classified as financial or non-financial. Non-financial investments include real estate, gold, and commodities. Financial investments involve an exchange of cash flows over a period of time.
    • Financial instruments represent claims on future cash flows. Two main types of financial instruments are debt and equity.
    • Equity represents ownership in a company, granting shareholders a share in profits and voting rights. Equity shareholders are residual claim holders. Investment rewards include dividends and capital appreciation.

    Equity Characteristics and Role

    • Equity shares represent ownership, entitling holders to profits and voting rights.
    • Equity shareholders are the residual owners of the firm, controlling its operations after other claims are met.
    • Equity investments offer time diversification benefits.
    • Diversification reduces risk over longer holding periods; improving risk-adjusted return.

    Types of Investment

    • Equity: Ownership in a company, with potential for dividends and capital gains.
    • Fixed Income: Cash flow streams from various debt instruments like bonds.
    • Commodities: Raw materials or agricultural products (e.g., gold, corn).
    • Real Estate: Physical property, used for both investment and income.
    • Structured products: Sophisticated investment vehicles derived from other assets.
    • Distressed securities: Securities of companies in financial distress.
    • Other investment opportunities: Art, paintings, and rare collectibles.

    Channels for Making Investments

    • Direct investments: Investors purchase securities, commodities, or other assets directly.
    • Indirect investments: Investors use managed portfolios (e.g., mutual funds, AIFs, Portfolio Managers) to pool money for investments.

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    Related Documents

    Investment Advisor Level 1 Module 3 PDF

    Description

    Test your knowledge on key financial concepts, focusing on the P/E ratio, intrinsic value calculations, and types of shares. This quiz covers various aspects of valuation techniques and stock market analysis, making it ideal for finance students and professionals alike.

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