Unit study guide · NISM Series XXI-A
Investing in Stocks
15 questions in this unit
What this unit covers
- Compared with a contractual debt claim, which feature most directly characterises ordinary equity capital?
- An investor replaces one company’s shares with a broad portfolio across unrelated industries. Which risk is least likely to be eliminated by that change?
- An analyst first studies economic growth, then compares industries, and finally values companies in a selected industry. Which approach is being used?
- An analyst identifies an apparently undervalued business from its cash generation and competitive position, then checks industry and economic risks. What best describes the starting approach?
- A share trades at ₹540 and has earnings per share of ₹30 for the specified year. What is its price-to-earnings multiple on that earnings basis?
- A company has ₹400 crore of equity attributable to ordinary shareholders and 20 crore ordinary shares. At a market price of ₹60 per share, what is the price-to-book multiple?
- Use enterprise value = equity market value + debt − cash. A company has equity value ₹1,000 crore, debt ₹250 crore, cash ₹100 crore and EBITDA ₹230 crore. What is EV/EBITDA?
- A share has a P/E of 24 and forecast annual earnings growth of 12%. Using the PEG convention with growth entered as the whole percentage number, what is the PEG ratio?
- A share is expected to pay ₹6 at the end of one year and be worth ₹115 immediately after that payment. With a required annual return of 10%, what is its present value?
- For a simplified asset-based valuation, adjusted asset value is ₹600 crore, liabilities are ₹240 crore and 30 crore ordinary shares are outstanding. What value per share follows?
- A loss-making company has a negative P/E, while a profitable peer has a positive P/E. Which interpretation is most defensible?
- Two firms have comparable accounting measures, but one trades at a much higher P/E. Which investigation is most relevant before calling it overvalued?
- A client holds 300 shares at ₹800 immediately before a two-for-one share split. Ignoring market movements, what is the theoretical new price per share?
- Which research activity most directly illustrates technical analysis?
- A firm reports rapid profit growth, but operating cash flow weakens while receivables rise much faster than sales. What is the most useful next research step?
Key ideas
From the practice bank · 1
Compared with a contractual debt claim, which feature most directly characterises ordinary equity capital?
Equity is ownership capital. Its payoff depends on the value remaining after higher-priority claims. A lender’s contract and an ordinary shareholder’s ownership interest are different claims. The residual nature permits participation in growth but also exposes shareholders to substantial downside when enterprise value falls. Remember: Equity ownership offers residual participation, not a fixed contractual return.
Hint Common mistake: Confusing a company’s history of paying dividends with a contractual guarantee.
XXI-A-019From the practice bank · 2
An investor replaces one company’s shares with a broad portfolio across unrelated industries. Which risk is least likely to be eliminated by that change?
Diversification can reduce company-specific concentration but does not remove systematic market exposure. The portfolio changes the spread of issuer and industry exposures. A common market factor can still affect many holdings at once, so the broad-market risk is not eliminated. Remember: Diversification changes the composition of risk, not the existence of risk.
Hint Common mistake: Treating a large number of holdings as protection against every market decline.
XXI-A-020From the practice bank · 3
An analyst first studies economic growth, then compares industries, and finally values companies in a selected industry. Which approach is being used?
Top-down analysis links economic conditions, industry prospects and company characteristics in that order. Identify the starting point: the analyst begins with the economic environment. Industry selection narrows the opportunity set before company valuation. That economy-industry-company sequence is top-down. Remember: Identify a research approach by its starting point and sequence.
Hint Common mistake: Assuming that every fundamental analyst necessarily starts with an individual company.
XXI-A-021From the practice bank · 4
An analyst identifies an apparently undervalued business from its cash generation and competitive position, then checks industry and economic risks. What best describes the starting approach?
Bottom-up analysis starts with an individual company’s economics or valuation. It need not ignore the wider environment. The first filter is the firm’s cash generation, competitive position and assessed value. Later macroeconomic checks supplement that company-led process rather than converting it into top-down selection. Remember: Bottom-up does not mean that industry and macroeconomic risks can be ignored.
Hint Common mistake: Defining an approach by any one input instead of the order and role of the inputs.
XXI-A-022From the practice bank · 5
A share trades at ₹540 and has earnings per share of ₹30 for the specified year. What is its price-to-earnings multiple on that earnings basis?
The P/E multiple compares the market price of one share with earnings attributable to one share for a defined period. Use P/E = market price per share ÷ earnings per share. ₹540 ÷ ₹30 = 18 times. The specified earnings period matters when comparing this multiple with another company. Remember: Use consistent per-share figures and the same earnings basis for comparisons.
Hint Common mistake: Mixing a share price with total company earnings.
XXI-A-023From the practice bank · 6
A company has ₹400 crore of equity attributable to ordinary shareholders and 20 crore ordinary shares. At a market price of ₹60 per share, what is the price-to-book multiple?
Price-to-book compares market value with the accounting equity attributable to the same ownership claim. Book value per ordinary share = ₹400 crore ÷ 20 crore shares = ₹20. P/B = ₹60 ÷ ₹20 = 3 times. The crore units cancel when calculating the per-share amount. Remember: Convert total book equity to a per-share amount before comparing it with a share price.
Hint Common mistake: Dividing quantities expressed on different ownership bases.
XXI-A-024From the practice bank · 7
Use enterprise value = equity market value + debt − cash. A company has equity value ₹1,000 crore, debt ₹250 crore, cash ₹100 crore and EBITDA ₹230 crore. What is EV/EBITDA?
An enterprise-value multiple compares the value of operating capital claims with an operating earnings measure before financing costs. Apply the expressly supplied definition: EV = 1,000 + 250 − 100 = ₹1,150 crore. Divide ₹1,150 crore by ₹230 crore EBITDA to obtain 5.00 times. All figures use the same currency scale. Remember: Match an enterprise-level numerator with an enterprise-level earnings denominator.
Hint Common mistake: Using equity value in an EV multiple or adding rather than subtracting cash.
XXI-A-025From the practice bank · 8
A share has a P/E of 24 and forecast annual earnings growth of 12%. Using the PEG convention with growth entered as the whole percentage number, what is the PEG ratio?
PEG relates an earnings multiple to an assumed growth rate. Its value depends on the convention and credibility of the growth forecast. Use PEG = P/E ÷ growth expressed as a whole percentage number. Substitute 24 ÷ 12 = 2.00. A computed PEG does not establish that the growth forecast will be achieved. Remember: State and follow the growth-unit convention in PEG calculations.
Hint Common mistake: Using 0.12 instead of 12 under the whole-percentage convention.
XXI-A-026From the practice bank · 9
A share is expected to pay ₹6 at the end of one year and be worth ₹115 immediately after that payment. With a required annual return of 10%, what is its present value?
A one-period valuation discounts the expected cash payment and the expected remaining asset value to today. Year-end value to the investor = ₹6 + ₹115 = ₹121. Present value = ₹121 ÷ 1.10 = ₹110. The terminal price is stated after the cash payment, so adding the payment does not double count it. Remember: Check whether the terminal price includes or excludes a separate distribution.
Hint Common mistake: Ignoring a distribution or counting it twice.
XXI-A-027From the practice bank · 10
For a simplified asset-based valuation, adjusted asset value is ₹600 crore, liabilities are ₹240 crore and 30 crore ordinary shares are outstanding. What value per share follows?
An asset-based equity valuation deducts liabilities from the assessed value of assets before allocating value to ordinary shares. Net asset value attributable to ordinary equity = ₹600 crore − ₹240 crore = ₹360 crore. Per-share value = ₹360 crore ÷ 30 crore shares = ₹12. No additional claims or adjustments are assumed. Remember: Equity receives net asset value, not gross asset value.
Hint Common mistake: Forgetting that liabilities rank ahead of ordinary equity.
XXI-A-028From the practice bank · 11
A loss-making company has a negative P/E, while a profitable peer has a positive P/E. Which interpretation is most defensible?
A valuation multiple needs an economically meaningful denominator. Losses can make a simple positive-P/E ranking inappropriate. A negative multiple may result from negative earnings rather than a low market valuation. Investigate the loss, normalisation assumptions and alternative valuation measures before making a comparison. Remember: Interpret the denominator before comparing the numerical size of valuation multiples.
Hint Common mistake: Sorting P/E values from lowest to highest without checking whether earnings are positive.
XXI-A-029From the practice bank · 12
Two firms have comparable accounting measures, but one trades at a much higher P/E. Which investigation is most relevant before calling it overvalued?
A relative valuation comparison requires comparable economics, not merely the same industry label or accounting ratio. The higher multiple is a fact to explain, not a complete conclusion about value. Review growth expectations, capital needs, risk and the persistence of earnings. The premium may still be unjustified if those assumptions are too optimistic. Remember: A higher multiple can reflect different expectations, but expectations must be examined.
Hint Common mistake: Treating one ratio as a complete valuation without studying its drivers.
XXI-A-030From the practice bank · 13
A client holds 300 shares at ₹800 immediately before a two-for-one share split. Ignoring market movements, what is the theoretical new price per share?
A share split changes the number of units representing ownership, not the investor’s proportional ownership by itself. The new count is 300 × 2 = 600 shares. Theoretical price is ₹800 ÷ 2 = ₹400. Both the old and new holdings equal ₹2,40,000 before unrelated price movements. Remember: A mechanical change in share count need not change wealth.
Hint Common mistake: Counting extra shares as a gain without adjusting the per-share value.
XXI-A-031From the practice bank · 14
Which research activity most directly illustrates technical analysis?
Technical and fundamental analysis use different primary inputs, although an analyst may consider both. Identify the data used in the activity rather than the security being analysed. Price and volume patterns are technical inputs. Cash flows, operating assets and margins are fundamental inputs. Remember: Classify analysis by its main evidence and method.
Hint Common mistake: Calling any analysis of a listed share technical analysis.
XXI-A-032From the practice bank · 15
A firm reports rapid profit growth, but operating cash flow weakens while receivables rise much faster than sales. What is the most useful next research step?
Earnings quality analysis asks how accounting performance connects to cash generation and the economic substance of transactions. Compare the growth in sales, receivables and cash collected. Investigate changes in credit terms or recognition policies. Assess whether the working-capital build-up is temporary and recoverable or indicates weaker collections. Avoid a fraud conclusion without sufficient evidence. Remember: Treat a profit-cash-flow divergence as a research question, not an automatic verdict.
Hint Common mistake: Equating reported profit with cash available to investors.
XXI-A-033