Question

2. As an investment manager, you frequently make decisions about investing in stocks versus other types of investments, and about types of stocks to purchase.

1. You have noticed that investors tend to invest more heavily in stocks after interest rates have declined. You are considering this strategy as well. Is it rational to invest more heavily in stocks once interest rates have declined? 3 marks       

2. Assume that you are about to select a specific stock that will perform well in response to an expected runup in the stock market. You are very confident that the stock market will perform well in the near future. Recently, a friend recommended that you consider purchasing stock of a specific firm because it had decent earnings over the last few years, it has a low beta (reflecting a low degree of systematic risk), and its beta is expected to remain low. You normally rely on beta as a measurement of a firm’s systematic risk. Should you seriously consider buying that stock? Explain. 3 marks

3. You are considering an investment in an initial public offering (IPO) by Arunaxmi Co., which has performed very well recently, according to its financial statements. The firm will use some of the proceeds from selling stock to pay off some of its bank loans. How can you apply stock valuation models to estimate this firm’s value, when its stock was not publicly traded? Once you estimate the value of the firm, how can you use this information to determine whether to invest in it? What are some limitations involved in estimating the value of this firm?4 marks

Answer 1

Q1: ANS: When interest rate falls ,it becomes better for investors to buy more stocks, as we know that there is a inverse relationship between interest rate and stock price. When interst rate decline it becomes beneficial for investors to get more return in future from invested stocks.

Q2: Ans: Low beta means it has very less systematic risk which is better for investors to buy stocks. because in that situation market risk which is called as market movement or market swings is not at all or negligible. which can't harm or reduce return. that's why it is good situation for investors to buy more stocks.

Q3: Ans:Ipo has performed better in the market . firstly it is good sign for company and for investors to invest in it.

Before ipo issuance for valuation of company, management, board of directors do comparative analysis of company. They must do Discounted cash flow method nalysis for 5 of 7 years to know the cash flow strength of company..

They must do equity analysis, enterprise valuation, discounted cash flow and terminal value for company are necessary.

limtation:

industry and market value may not support.

if market sector remain undervalued.