{"id":19530,"date":"2023-04-01T12:29:13","date_gmt":"2023-04-01T06:59:13","guid":{"rendered":"https:\/\/gstguntur.com\/?p=19530"},"modified":"2023-04-01T12:29:13","modified_gmt":"2023-04-01T06:59:13","slug":"security-valuation-ca-final-sfm-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/security-valuation-ca-final-sfm-study-material\/","title":{"rendered":"Security Valuation \u2013 CA Final SFM Study Material"},"content":{"rendered":"

Security Valuation \u2013 CA Final SFM Study Material<\/a>\u00a0is designed strictly as per the latest syllabus and exam pattern.<\/p>\n

Security Valuation \u2013 CA Final SFM Study Material<\/h2>\n

Part – 1 (Theory)<\/strong><\/p>\n

Question 1.
\nWrite a short note on Zero coupon bonds [May 2012] [4 Marks]
\nAnswer:
\nZero coupon bonds are issued by Banks, Government and Private Sec-tor companies. These bonds do not pay interest during the life of the bonds. Instead, they are issued at discounted price to their face value, which is the amount a bond will be worth when it matures or comes due. When it matures, the investor receives a lump sum amount equal to the initial investment plus interest that has been accrued on the investment made. The maturity dates on zero coupon bonds are usually long term. Bonds issued by corporate sector carry a potentially higher degree of risk, depending on the financial strength of the issuer and longer maturity period, but they also provide an opportunity to achieve a higher return.<\/p>\n

Question 2.
\nWrite a short note on Traditional & Walter Approach to Dividend Policy. [May 2014] [4 Marks]
\nAnswer:
\nTraditional approach:
\nIt is also known as the \u201cThe Graham and Dodd model\u201d as it was expounded by him. According to the model, the stock market places considerably more weight on dividends than on retained earnings. This is expressed quantitatively in the following valuation model:
\nP = m(D + E\/3)
\nWhere, P = Market price of the share
\nD = Dividend per share
\nE = Earnings per share
\nm = a multiplier.<\/p>\n

This model is based on the following assumptions:
\n(a) Investors are rational
\n(b) Under conditions of uncertainty, they turn risk averse.
\nUnder this model, the weight attached to dividends is equal to four times the weight attached to retained earnings. The weights provided by Graham and Dodd are based on their subjective judgment and not derived from any empirical analysis.
\nInvestors discount distant dividends at a higher rate than they discount nearby dividend. This is because nearby dividends are more certain than distant dividends.<\/p>\n

Walter approach:
\nThe Walter\u2019s Model propounded in 1963 by John E Walter supports the doc-trine that dividends are relevant. The investment policy of the firm cannot be separated from its dividend policy and both are interlinked. The choice of an appropriate dividend policy affects the value of any firm. It is based on the following assumptions:
\n(a) The firm is an all equity firm.
\n(b) The firm will use only retained earnings to finance its investments.
\n(c) The rate of return on investment is constant and so is the cost of equity. This means that with every additional investment, business risk remains unaltered.
\n(d) All earnings are either distributed or retained internally.
\n(e) The firm has a perpetual or very long life.
\n(f) Earnings and dividends don\u2019t change over the life of the firm.<\/p>\n

Walter argued that the market price of a share is the sum of the present value of the following two cash flow streams:<\/p>\n