Page 112 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 3: Introduction to Security Analysis

5. Under excess profits approach, goodwill is taken to be the difference between the purchase Notes
price and the fair market value of an acquired company’s assets.
6. The enterprise value includes the value of any outstanding warrants.

7. Security analysis is about valuing the assets, debt, warrants, and equity of companies from
the perspective of outside investors using publicly available information.
8. Once the valuation calculation is made free cash flow and WACC can be known.

9. Amortisation of recorded goodwill enables the company to match the cost of intangible
assets with benefits from their use.
10. The “cash flow to equity” approach to valuation directly discounts the firm’s cash flow to
the equity owners.
11. The more volatile the underlying instrument, the higher the price of the warrant will be.
12. Time value increases as the expiry of the warrant gets closer.

13. The hurdle rate is the maximum acceptable return on an investment.
14. Hidden assets are always intangible in nature.
15. Companies valuing goodwill, follow the residuum approach to capitalise their assets.

3.13 Review Questions

1. Why do the companies buyback?

2. How do you suggest getting the Buyback value disbursed?
3. A company has purchased the proprietory concern (sale to a co). In this case company paid
70 lacs as goodwill (as per agreement of sale deed). While finalizing the accounts of the
co., how this goodwill be recognized. Proprietory concern is a Hospital.
(a) Can we treat this goodwill paid in cash as intellectual property?
(b) Can we capitalize this?

(c) Can we claim amortisation on this as intangible asset?
4. In you view, what will effect a warrant’s time value?
5. The NPV is greatly affected by the discount rate. Comment.

6. What are warrants? How they are traded?
7. Examine the impact of the restrictions on buyback by Indian companies.
8. Why should supplier credit not be considered as a source of financing like bank and other
long-term debts or like equity, when calculating WACC?
9. Can a reduction in net financial debt (prompted by a decrease in working capital) reduce
WACC? Why/Why not?

10. What do think as the most customary question that security analysis attempts to answer?
What is its significance?
11. Investors will act only on the basis of expected returns on bonds of various maturities. IS
this statement true or false according to you. Justify your answer with proper reasoning.

LOVELY PROFESSIONAL UNIVERSITY 107