Quiz 18 Equity Research Questions and Answers

Question No 1

1. What do Equity Researchers do?

  • Analyse equities and provide recommendations on Buy, Sell or Hold
  • Attend meetings/calls with company management to understand the company’s strategies and growth plans
  • Prepare and update financial models and equity research reports
  • All of the above

Answer: All of the above

Equity Research professionals analyse listed companies through primary (calls/meetings with company’s management, industry experts etc.) and secondary research...

Question No 2

2. Calculate Enterprise Value of the company if Market Capitalization is 100 Cr, Debt is 100 Cr and Cash in the books is 20 Cr?

  • 200 Cr
  • 180 Cr
  • 100 Cr
  • 120 Cr

Answer: 180 Cre

Enterprise Value = Market Value of Common Stock + Market Value of Debt– Cash & Investments = 100+100-20 = 180 Cr

Question No 3

3. The EPS of XYZ Ltd. is Rs 10 whereas the net profit margins are at 15%. The networth of the company is 100 Cr and no of shares are 4 Cr. D/E ratio is 2x. Calculate the ROE of the XYZ ltd.?

  • 15%
  • 40%
  • 67%
  • 20%

Answer: 40%

ROE= Net Income/Shareholders Equity
EPS = Net Income/No. of Shares.
Hence, Net Income = EPS X No. of Shares = Rs. 10 X 4 Cr = 40 Cr
Shareholders Equity = Networth = 100 Cr
ROE = 40 Cr/100 Cr = 40%

Question No 4

4. Which of the following listed companies in the telecom space are worst hit by the Supreme Court ruling on Adjusted Gross Revenues (AGR)?

  • Vodafone-Idea
  • Bharti Airtel Limited
  • Reliance Industries Limited
  • Bharti Infratel

Answer: Vodafone-Idea

Telecom operators are collectively liable to pay 1.47 lakh crore in AGR dues as per the Supreme Court order dated October 24, 2019. Airtel owes 35, 586 Cr, while Vodafone Idea owed 53,000 Crs.

Question No 5

5. The table represents the P/E Ratio of XYZ Ltd over the period 2012-2016.Which inferences cannot hold true?

  • The stock is lagging behind in the year 2016. This is because of slowing revenues.
  • XYZ has had a fantastic sales performance in the year 2016.
  • The company’s industry was doing well in the year 2014
  • All of the above

Answer: XYZ has had a fantastic sales performance in the year 2016.

In the year 2016, P/E Ratio has fallen to 11.3, which indicates that investors are not willing to pay a higher price even for future growth. Lower EPS in 2016 also indicates slowing revenues. In 2014, the P/E was 29.75, which indicated that investors were willng to pay higher price, indicating that the industry was doing really well. Thus Options a and c are true, while option b is not true.

Question No 6

6. The use of financial leverage by a firm may be measured by the

  • Ratio of debt to total assets
  • Firm’s beta coefficient
  • Firm’s retention of earnings
  • Ratio of the price of the firm’s stock price to its earnings

Answer: Ratio of debt to total assets

When the Financial leverage increases, a greater proportion of the firm’s assets are financed by debt.

Question No 7

7. Equity does NOT include

  • Cash
  • Common stock
  • Paid-in capital
  • Retained earnings

Answer: Cash

Equity = Common stock + Paid-in capital + Retained earnings

Question No 8

8. Calculate ROE of a firm with following details. Net Income is 10 Cr; Sales is 100 Cr, Sales/Assets is 3 and Assets/Equity is 20%.

  • 6%
  • 9%
  • 12%
  • 8%

Answer: 6%

ROE = (Net Income/Sales) X (Sales/Assets) X (Assets/Equity)
ROE = (10/100 ) X 3 X 20 % = 6%

Question No 9

9. A market for existing (already issued) securities, such as the BSE or NSE, rather than new issues is known as the __________ market.

  • Primary
  • Secondary
  • Tertiary
  • Capital

Answer: Secondary

The secondary market is where securities are traded after the company has sold its offering on the primary market.

Question No 10

10. What happens to the average common stock price immediately after the announcement of a new equity issue by a publicly traded firm?

  • The average stock price increases slightly
  • The average stock price decreases slightly
  • The average stock price does not generally change because no new information is provided to investors.
  • The average stock price does not generally change because of asymmetric information

Answer:The average stock price decreases slightly

The company has additional cash, which is not yet put into assets which can generate revenues. This reduces the value of the company and hence the stock prices reduce. Additionally, the holdings of current investor also dilutes.