Unit study guide · NISM Series XXI-B
Investing in Stocks and Equity Research
7 questions in this unit
What this unit covers
- Which research sequence is most consistent with a top-down equity analysis?
- Which practice most clearly helps protect minority shareholders from a controlling shareholder’s conflicts?
- A share costs ₹480 and annual earnings per share are ₹20. What is its price-to-earnings ratio?
- Net assets are ₹10 crore across 2 lakh ordinary shares. At ₹750 per share, what is the price-to-book ratio?
- Next year’s dividend is ₹6, perpetual dividend growth is 5%, and required return is 11%. What is the constant-growth value?
- Which input is most directly associated with technical analysis rather than fundamental valuation?
- Market value of equity is ₹500 crore, debt ₹200 crore, cash ₹50 crore, and EBITDA ₹65 crore. What is EV/EBITDA?
Key ideas
From the practice bank · 1
Which research sequence is most consistent with a top-down equity analysis?
Top-down analysis moves from the economy to industries and then to individual companies. It uses the broader environment to guide more specific research. Remember: Top-down research begins with the economic setting.
Hint Start with the broadest environment and narrow the analysis. Common mistake: Calling any detailed company report a top-down study.
XXI-B-008From the practice bank · 2
Which practice most clearly helps protect minority shareholders from a controlling shareholder’s conflicts?
Independent review helps assess whether related-party transactions treat the company and minority shareholders fairly. It does not make every such transaction harmful or risk-free. Remember: Good governance includes oversight of conflicts involving controlling owners.
Hint Look for a check on decisions made by an interested person. Common mistake: Assuming a controlling shareholder’s approval is enough to establish fairness.
XXI-B-009From the practice bank · 3
A share costs ₹480 and annual earnings per share are ₹20. What is its price-to-earnings ratio?
The price-to-earnings ratio is 24 times because the price is 24 times annual earnings per share. Working: ₹480 ÷ ₹20 = 24. Remember: Use consistent per-share price and earnings figures for a price-to-earnings ratio.
Hint Relate the amount paid for one share to the earnings belonging to it. Common mistake: Inverting the ratio and reporting an earnings yield instead.
XXI-B-010From the practice bank · 4
Net assets are ₹10 crore across 2 lakh ordinary shares. At ₹750 per share, what is the price-to-book ratio?
The price-to-book ratio is 1.50 times because book value per share is ₹500. Book value per share = ₹10,00,00,000 ÷ 2,00,000 = ₹500. Price-to-book = ₹750 ÷ ₹500 = 1.50. Remember: Keep crore, lakh and per-share units consistent.
Hint Calculate book value per ordinary share before comparing the market price. Common mistake: Dividing a per-share price directly by the company’s total net assets.
XXI-B-011From the practice bank · 5
Next year’s dividend is ₹6, perpetual dividend growth is 5%, and required return is 11%. What is the constant-growth value?
The constant-growth value is ₹100 because the next dividend is discounted using the required-return spread over growth. Value = next dividend ÷ (required return − growth). Working: ₹6 ÷ (0.11 − 0.05) = ₹100. Remember: The constant-growth dividend model requires required return to exceed growth.
Hint Identify whether the dividend is current or already next year’s amount. Common mistake: Growing next year’s dividend again before using the model.
XXI-B-012From the practice bank · 6
Which input is most directly associated with technical analysis rather than fundamental valuation?
Technical analysis studies market behaviour such as price and volume patterns. These patterns do not guarantee a future price direction. Remember: Technical signals and fundamental value estimates answer different questions.
Hint Distinguish market behaviour from the business’s financial drivers. Common mistake: Treating a chart pattern as a certain forecast of future returns.
XXI-B-013From the practice bank · 7
Market value of equity is ₹500 crore, debt ₹200 crore, cash ₹50 crore, and EBITDA ₹65 crore. What is EV/EBITDA?
EV/EBITDA is 10 times because enterprise value is ₹650 crore. EBITDA means earnings before interest, tax, depreciation and amortisation. With no other adjustments, enterprise value = equity value + debt − cash = ₹500 + ₹200 − ₹50 = ₹650 crore. Divide ₹650 crore by ₹65 crore to obtain 10. Remember: Enterprise value normally adds debt and deducts cash from equity value.
Hint Separate the operating business value from its financing and surplus cash. Common mistake: Using market capitalisation alone with a measure earned by the whole business.
XXI-B-014