Monday, January 29, 2007

Solutions to Key talking points - 3

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Hey all,

Many complained to me that the questions were very tough. I am sorry for the same, though after reading some of the answers I am sure you would learn some basics. Will try to keep them more ‘within syllabus’ next time :) In the meantime, let me know any area you want me cover in the future group discussions

Note: When you answer these questions, you have to note that ‘the rest of the factors are constant’.
1. If Government goes ahead with the decision to invest about 5% of pension funds in the stock market, would is push the stock market higher?
It goes up since there are more buyers (more money). It may go up very small percentage as b2b noted.
Another reason, apart from maths, why it will go up is that it shows the intent of the Government to be more pro-active in investing its funds in the market

2. A company has a PE ratio of x and is doing 30% profit growth every year. If starts doing 50% growth a year, does the PE ratio go up?
PE ratio = price/’earning per share’. PE ratio is not just a numerator vs denominator ratio value. It is an indicator of how the market sees the “company’s future potential”. E.g., If company A has a higher PE ration than B, that means that the market believes that the company A will give it better returns than company B in the future. So instead of 30%, if a company starts doing 50% earnings the price will go up and so will the PE ratio. Numerator will go up more than the denominator.
Note that the PE of the sensex itself has gone up in the last 6 months indicating that the market has more confidence in the future economy than it had in the past. So rather than people saying that the index has gone up, saying that PE has gone up shows that the market is more bullish on the economy. It is a hint for the next GD topic :)

3. If company A has profits higher than that of company B, who would have a higher PE ratio, with both being in the same industry
Sorry that the question was a little vague. I meant earning per share when I said profits. As it follows from the previous explanation, in a fair market A should have a higher PE ratio.

4. If returns become higher by investing in stock market, why are people opposed to pension funds investing in stock market?
All were on the mark. Risk is also going up.

5. If a stock worth Rs 1000 is split into two stocks worth Rs 500, would it have an upward impact on the price?
Liquidity is increased and hence the price should go up with other factors remaining constant, though by a small amount

6. If the exports of India were to increase by 25% next year, would it have an appreciating effect on the rupee?
Yes it would. The demand for rupee has gone up and hence should appreciate. Similarly if imports go up, dollar demand increases and hence rupee should depreciate.
Again with all factors constant

7. If reserve bank of India increases the lending rate, would it have an upward impact on the real estate prices?
Downward impact as most pointed out since the demand goes down

8. If the prices of fuel were to go up, would it have upward pressure on inflation?
Yes it would since essential commodity prices would go up

9. If the prices of dal were to go up, would it have upward pressure on inflation?
Dal is a part of the inflation calculation (CPI and WPI) as some pointed and hence it goes up. Read up on WPI and CPI from the net.

10. If the prices of cars were to go up would it have upward pressure on inflation?
Cars not part of inflation calculation and hence it would not go up

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