Oromia State University

College of Finance and management studies

Department of Accounting & Finance
2018 A.Y; 2015 Entry Regular mangement Degree Program students
Assignment for the course of financial management
Name __________________ Id ___________section ________
Maximum
weight ( 20%)
Instructions:
 Attempt all question
 Submission Date: on the date of final exam
1. The Oda Transportation Company wants to purchase a new truck. The truck would cost
Br.225,000 and its salvage value would be 10% at the end of its 20-year useful life. The
annual estimated revenues and costs associated with the new truck are given below.
Revenue ---------------------------------------------------- 125,000
Less operating Expenses:
Maintenance ------------------------ 20,000
Salaries ------------------------------ 45,000
Insurance ---------------------------- 15,000
Depreciation ------------------------ 10,125 90,125
Net operating income 34,875
Required
A. Compute Payback period of the truck is the investment in new truck desirable if maximum
desired payback period of the Oda transport company is 5 years?
B. Compute ARR promised by the truck would the Oda transport company be interested in
new truck if minimum required ARR is 12%?
2. What the present Value of Br. 1,000,000 received in two years if the interest rate is?
A. 12% per year discounted annually.

B. 12% per year discounted semi annually.

C. 12% per year discounted daily.

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4. A company is expecting to receive $5,000 four years from now. Compute present value of
this sum if the current market interest rate is 10% and the interest is compounded annually.
[Link] the following, solving for present value PV
Case Future value Interest rate Number of periods Present value
A 10,000 5% 5
B 563,000 4% 20
C 5,000 5.5% 3
6. An investment supplies $5,000 in year 1, $4,000 in year 2, $3,000 in year 3 and $1,000 in year
4 What is the value of the investment if the interest rate is 10%?
7. Following information is given about interest rate: Nominal rate: 20% Real risk free rate: 5%
Inflation premium: 4% If the risk premium incorporates default risk, liquidity risks, and any
maturity premium, compute the risk premium
8. Ato Chala plans to save for his 5-year doctorate degree, which starts 6 years from now. The
current annual expenditure is $7,200 and it is expected to grow by 7 percent annually. Chala
will need to make the first payment 6 years from today. He identifies a savings plan that
allows him to earn an interest of 8 percent annually. How much should Chala deposit each
year, starting one year from today? Assume that he plans to make 5 payments
9. You plan to retire 33 years from now. You expect that you will live 27 years after retiring.
You want to have enough money upon reaching retirement age to withdraw $180,000 from
the account at the beginning of each year you expect to live, and yet still have $2,500,000 left
in the account at the time of your expected death (60 years from now). You plan to
accumulate the retirement fund by making equal annual deposits at the end of each year for
the next 33 years. You expect that you will be able to earn 12% per year on your deposits.
However, you only expect to earn 6% per year on your investment after you retire since you
will choose to place the money in less risky investments. What equal annual deposits must
you make each year to reach your retirement goal?

10. On January 1, 2020, Tourist Hotel has borrowed Birr 2,000,000 by issuing an 12% note
compounded annually from Cooperative bank of Oromia, which is payable Br. 400,000 a
year for five years starting on December 31, year 1.
What is the present value of this debt on January 1, year 1? Prepare a loan amortization

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 Oromia State University
College of Finance and management studies
Department of Accounting & Finance
2018 A.Y; 2015 Entry regular Degree Program students
Work sheet for the course of financial management
. Choose the letter of the best answer and write your answer in a blank sheet of paper
1. The field of finance is closely related to the fields of:
A. statistics and economics
B. statistics and risk analysis
C. economics and accounting
D. accounting and comparative return analysis
2. The first area of study to benefit from the focus in the 1950's to a more analytical,
Decision oriented approach was:
A. cash and inventory management
B. capital budgeting (allocating financial capital to the purchase of plant and equipment)
C. capital structure formulation (the balance between liabilities and equity)
D. dividend policy ( the relationship between dividends and earnings
3. Which of the following is not the responsibility of financial management?
A. allocation of funds to current and capital assets
B. obtaining the best mix of financing alternatives
C. preparation of the firm's accounting statements
D. development of an appropriate dividend policy
4. In analyzing the firm, the investor should consider:
A. The mix of debt and equity in a firm is referred to as the firm's:
B. primary capital
C. capital composition
D. capital structure
5. The main focus of finance for the last 40 years has been:
A. mergers and acquisitions C. inflation
B. conglomerate firms D. risk-return relationships
6. "Shareholder wealth" in a firm is represented by:
A. The number of people employed in the firm.

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 B. The book value of the firm's assets less the book value of its liabilities.
C. The amount of salary paid to its employees.
D. The market price per share of the firm's common stock.
7. The long-run objective of financial management is to:
A. Maximize earnings per share.
B. Maximize the value of the firm's common stock.
C. Maximize return on investment.
D. Maximize market share.
8. The decision functions of financial management can be broken down into the decisions.
A. financing and investment
B. investment, financing, and asset management
C. financing and dividend
D. capital budgeting, cash management, and credit ma
9. The ultimate measure of performance is:
A. the amount of the firm's earnings
B. how the earnings are valued by the investor
C. the firm's profit margin
D. return on the firm's total assets
10. Which of the following would NOT improve the current ratio?
[Link] short term to finance additional fixed assets.
B. Issue long-term debt to buy inventory.
C. Sell common stock to reduce current liabilities.
D. Sell fixed assets to reduce accounts payable.
11. The gross profit margin is unchanged, but the net profit margin declined over the same
period. This could have happened if
[Link] of goods sold increased relative to sales.
B. Sales increased relative to expenses.
C. The Government increased the tax rate.
D. Dividends were decreased.
12. MESSI Company's debt-to-total assets (D/TA) ratio is 0.4. What is its debt-to-equity (D/E) ratio?
A. 0.2 C. 0.667
B. 0.6 D. 0.333

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13. Profitability ratios measure:
A. the speed at which the firm is turning over its assets
B. the ability of the firm to earn an adequate return on sales, total assets, and invested capital
C. the firm's ability to pay off short term obligations as they are due
D. the debt position of the firm in light of its assets and earning power
14.. Liquidity ratios measure:
A. the speed at which the firm is turning over its assets
B. the ability of the firm to earn an adequate return on sales, total assets, and invested capital
C. the firm's ability to pay off short term obligations as they are due
D. the debt position of the firm in light of its assets and earning power.
15. Return on assets is computed:
A. net income/sales
B. net income/total assets
C. net income/current assets
D. income before interest and taxes (EBIT)/total assets
16. Under the Du Pont method of analysis, return on total assets is:
A. profit margin times assets turnover
B. net income/total assets
C. income before interest and taxes (EBIT)/total assets
D. net income/sales
17. Receivables turnover is:
A. a profitability ratio C. an asset utilization ratio
B. a debt utilization ratio D. a liquidity ratio
18. Financial ratios are used to:
A. weigh and evaluate the operating performance of the firm
B. provide an absolute benchmark of industry performance
C. determine which firm will provide the highest return to investors
D. None of the above are correct
19. To the banker/creditor, the most important ratio group is:
A. asset utilization C. debt utilization
B. profitability D. liquidity

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20. To the securities analyst, the most important ratio group is:
A. asset utilization C. liquidity
B. profitability D. debt utilization
21. If there is one talent essential to the financial manager, it is:
A. the ability to plan ahead and make necessary adjustments before actual events occur
B. the ability to accurately determine the firm's earnings
C. the ability to prepare the firm's financial statements
D. the ability to effectively factor the firm's receivables
22. The construction of the pro forma income statement is based on:
A. the prior year's income statement
B. sales projections and the production plan
C. the cash budget
D. the cash budget and prior year's income statement
23. Which of the following is not a step in the development of the pro forma income statement?
A. Establish a sales projection.
B. Determine a production schedule and associated expenses to determine gross profit.
C. Determine the cash receipts.
D. Determine profit by completing the actual pro forma statement.
24. In order to determine cash receipts, the financial manager must know:
A. projected sales and the collection pattern
B. projected sales and the profit margin
C. gross profit and the collection pattern
D. gross profit and taxes
25. All of the following are primary considerations for cash payments except:
A. material costs
B. labour and overhead costs
C. receivable receipts
D. disbursements for general & administrative expenses
26. The first step in preparing the pro forma balance sheet is to:
A. prepare the pro forma income statement
B. prepare the cash budget

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 C. prepare the statement of cash flows
D. examine the prior period's balance sheet and translate the items through time
27. In preparing the pro forma balance sheet, all of the following will normally remain
unchanged from the prior period except:
A. accounts receivable C. long term debt
B. marketable securities D. common stock
28. The percent of sales method of financial forecasting will help to identify:
A. the reasons for sales increases C. changes in asset/ liability relationships
B. financing needs D. Changes in earning
29. Under the percent of sales method, the relationship between sales and what type accounts are
assumed to maintain a constant relationship:
A. income statement C. balance sheet
B. cash budget D. cash flow
30.. Present Value is defined as:
A. BA. Future cash flows discounted to the present at an appropriate discount rate
B. Inverse of future cash flows
C. Present cash flow compounded into the future
D. None of the above
31. An annuity is defined as:
[Link] cash flows at equal intervals of time forever
B. Equal cash flows at equal intervals of time for a specific period
C. Unequal cash flows at equal intervals of time forever
D. None of the above
32. In 3 years you are to receive Birr 5,000. If the interest rate were to suddenly increase, the
present value of that future amount to you would
A. Fall. C. Remain unchanged
B. Rise. D. Cannot be determined without more information
33. An effective rate of return captures:
A. the time period C. compounding effects
B. present values D. tax consequences
34. Future value of an amount allowed to grow at a given interest rate over a period of time is

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 known as the:
A. future value - single amount C. future value - annuity
B. present value - single amount D. present value – annuity
35. The value in five years of a stream of equal payments received over the five year period is
known as:
A. future value – annuity C. compound sum - single amount
B. present value - annuity D. Differed value of annuity
36. A payoff schedule for a loan is known as:
A. a mortgage C. a principal
B. an interest schedule D. an amortization schedule
37. If interest or compounding is done on other than an annual basis, adjust by:
A. dividing the number of years by the number of compounding periods
B. multiplying the number of years by the number of compounding periods
C. dividing the interest rate by the number of compounding period
D. multiplying the years and dividing the interest rate by the number of compounding periods
38. To a depositor, the most desirable compounding period is:
A. Annually C. monthly
B. semi-annually D. daily
39. The time value of money plays an important role in which of the following:
A. understanding the effective rate on a business loan
B. understanding the composition of a mortgage payment
C. determining the true rate of return on an investment
D. all of the above
40. The capital budgeting decision involves the planning of expenditures for projects with
a life of at least:
A. one year C. ten years
B. five years D. fifteen years
41. The biggest problem facing a manager is:
A. the cost of financing
B. competitive pressures
C. the farther out the time horizon moves, the greater the uncertainty
D. changing economic conditions

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42. In most capital budgeting decisions, the emphasis is on:
A. reported income C. short-term profits
B. cash flows D. Long term profits
43. All of the following are widely used methods for evaluating capital projects except;
A. payback period C. net present value
B. internal rate of return D. weighted average cost of capital
44. Which of the following capital budgeting methods focuses on firm liquidity?
A. Average accounting return (AAR) C. Internal rate of return (IRR)
B. Net present value (NPV) D. Payback period (PP)
45. One of the main advantages of the payback period is:
A. it is easy to use and places a premium on liquidity
B. it ignores the time value of money
C. all inflows related to the decision are considered
D. outflows are equated with inflows using the rate of return
46. Under the net present value method:
A. the interest rate is determined that equates inflows and outflows
B. the time value of money is not taken into account
C. inflows are discounted back to determine if they exceed outflows
D. the basic discount rate is the internal rate of return
47. The basic discount rate used in net present value analysis is:
A. the internal rate of return C. the net discount rate
B. the cost of common equity D. the cost of capital to the firm
48. The internal rate of return method:
A. does not consider inflows after the cutoff period
B. calculates the interest rate that equates outflows with subsequent inflows
C. determines the time required to recoup the initial investment
D. determines whether future benefits justify current expenditures
49. With mutually exclusive projects:
A. both projects can be accepted
B. the project with the higher NPV is accepted
C. both projects are rejected
D. only one project is accepted

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50. Risk in capital budgeting may be defined as:
A. the chance the firm won't be able to meet its debt obligations
B. the possibility of the firm losing its competitive position
C. the variability of possible outcomes from a given investment
D. the possibility that the firm can't obtain funds needed to finance the desired asset
51. The two most important measures of risk are:
A. the variance and standard deviation
B. the expected value and standard deviation
C. the arithmetic mean and variance
D. the arithmetic mean and standard deviation
52. The expected value may be defined as:
A. a weighted average of outcomes times their probability
B. the arithmetic average of the outcomes
C. the median value of the possible outcomes
D. a measure of dispersion or variability
53. The standard deviation:
A. is the square root of the variance
B. measures dispersion or variability around the expected value
C. may be used to compare investments with the same expected return
D. all of the above are correct
54. All of the following are true of the coefficient of variation except:
A. it eliminates the size difficulty resulting from standard deviation
B. it is computed by dividing the standard deviation by the expected value
C. it measures the volatility of returns relative to the market
D. the larger the coefficient of variation, the greater the risk
[Link] valuation of a financial asset is based on determining:
A. the present value of future cash flows
B. the current yield to maturity on long term corporate bonds
C. the capital budgeting process
D. what the corporation is paying to attract preferred shareholders

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56. The interest rate used to discount the cash flows associated with a bond is:
A. the required rate of return on the firm's equity
B. the yield to maturity
C. the prime rate
D. None of the above
57. When the coupon rate on a bond is equal to the yield to maturity, the price of the bond
will be:
A. par C. below par
B. above par D. None of the above
58. All of the following factors influence the investor's required rate of return except:
A. the real required rate of return C. the risk premium
B. the inflation premium D. None of the above
59. If there is an increase in the inflation premium:
A. the yield to maturity will decrease
B. the price of the bond will decrease
C. the maturity of the bond will change proportionally
D. All of the above
60. The yield to maturity on a bond:
A. is determined by government regulations
B. equates principal and interest payments to the price of the bond
C. is constant with varying maturities
D. None of the above
61. The value of a share of common stock may be thought of as:
A. a perpetuity C. the present value of a perpetuity
B. an annuity D. None of the above
62. The required rate of return on an equity investment can be determined by:
A. the P/E yield plus the growth rate C. the earnings yield
B. the dividend yield plus the growth rate D. the revenue growth rate
63. The cost of capital is:
A. used as an evaluation tool
B. based on the present cost obligations of the firm
C. the cost of long-term investment

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 D. the cost of maintaining the bureaucrats in office
64. One assumption underlying the use of the cost of capital to analyze capital projects is
that:
A. current costs will remain the same
B. capital structure will vary with the type of financing
C. different risk projects are required to diversify the firm
D. the analyzed projects are of comparable risk to existing projects
65. The cost of debt is measured by:
A. the yield to maturity on the firm's bonds
B. the coupon rate on the firm's bonds
C. the weighted average cost of capital
D. the marginal cost of capital
66. The after-tax cost of debt is expressed:
A. Kd = Y/k(1-T) C. K = (1-t)/Y
B. Kd = Y(1-T) D. None of the foregoing
67. The cost of new preferred stock is determined:
A. by the cost of debt because they are similar C. Dp/Kp = P- F
B. by the cost of common stock D. Dp/Kp = Pp
68. The Capital Asset Pricing Model (CAPM) is another model for determining the equity
rate of return based on:
A. the risky rate of return, the beta coefficient of the stock, and the return on the market
leaders
B. the risk free rate of return, the beta coefficient of the stock, and the return on the
market index
C. the risky rate of return, the alpha coefficient of the stock, and the return on the market
leaders
D. the risk free rate of return, the beta coefficient of the stock, and the return on the
market leaders
69. The beta coefficient in the CAPM measures:
A. the return relative to the risk-free rate
B. the return relative to the market return
C. the historical volatility relative to the market's volatility
D. the required return on a financial asset

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70. The cost of retained earnings is equal to:
A. the return on new common stock C. the return on existing common stock
B. the return on preferred stock D. It does not have a cost.
71. The least expensive form of financing for the firm is:
A. existing common stock C. debt
B. preferred stock D. new common stock
72. The cost of capital is best calculated with:
A. market value weightings C. Modigliani and Miller weightings
B. book value weightings D. It doesn't matter.
73. Regardless of the type of asset being acquired, the appropriate discount rate is:
A. the after-tax cost of debt C. the weighted average cost of capital
B. the required rate of return D. the cost of equity capital
74. As more and more funds are required by the firm, the cost of each component of the capital
structure may increase. These incremental changes are most correctly referred to as
A. the weighted average cost of capital C. the cost of capital
B. the marginal cost of capital D. the cost of debt
75 Operating leverage may be defined as:
A. the degree to which debt is used in financing the firm
B. the difference between price and variable costs
C. the extent to which capital assets and fixed costs are utilized
D. the difference between fixed costs and the contribution margin
76. The conservative firm will utilize:
A. a high degree of operating leverage C. high fixed costs
B. a low degree of operating leverage D. a higher profit margin
77. The more aggressive firm:
A. substitutes higher fixed costs for variable costs
B. substitutes lower fixed costs for variable costs
C. has lower potential profit above the break-even point
D. is normally more effectively managed
78. If management of an aggressive firm is apprehensive about economic conditions:
A. a highly leveraged approach should be maintained
B. a conservative approach should be implemented
C. the use of leverage should be tailored to the desired level of risk
D. the attitude of the firm has no impact

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79. Most break-even analysis:
A. is conducted on the basis of cash flows
B. is theoretical only and has little impact on the firm
C. excludes fixed costs
D. is done on the basis of accounting flows
80. Degree of operating leverage may be defined as:
A. the extent to which the firm utilizes debt in its financing plan
B. the percent change in operating income/percent change in unit volume
C. the percent change in operating income/percent change in net profit
D. the percent change in net income/percent change in unit volume
81. Financial leverage:
A. reflects the firm's commitment to fixed, financial assets
B. has no impact on the earning of the firm
C. reflects the amount of debt used in the capital structure of the firm
D. primarily affects the left side of the balance sheet
82. The highly financially leveraged firm will typically:
A. have a higher EPS figure than the conservative firm
B. have a lower EPS figure than the conservative firm
C. use less debt than the conservative firm
D. produce the same EPS figure as the conservative firm
83. The degree of financial leverage may be defined as:
A. percent change in sales/percent change in volume
B. percent change in EPS/percent change in net income
C. percent change in EPS/percent change in EBIT
D. percent change in EPS/percent change in sales
84. The degree of financial leverage for the conservative firm:
A. is higher than the DFL for the highly leveraged firm A.
B. is the same as the DFL for the highly leveraged firm
C. is lower than the DFL for the highly leveraged firm
D. cannot be compared to the DFL for the highly leveraged firm
85. A high degree of financial leverage:
A. is a sign of astute financial management
B. will always decrease the cost of financing for the firm
C. will result in an increase of the firm's overall value in all cases

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 D. may increase the firm's risk and drive the price of the shares down
86. A higher degree of financial leverage may be desirable for:
A. a stable firm, with positive growth, under favorable economic conditions
B. an unstable firm operating in an uncertain environment
C. a stable firm operating in an uncertain environment
D. neither the stable nor unstable firm under any circumstances
87. Degree of combined leverage:
A. should be minimized by the financial manager
B. affects only balance sheet items
C. decreases the firm's operating profit
D. shows the impact of sales or volume changes on bottom line EPS
88. To enhance overall operating results, a firm should prudently use which of the following:
A. operating leverage C. combined leverage
B. financial leverage D. conservative leverage
89. The indifference point identifies:
A. equality of impact on EPS between two financing plans
B. equality of impact on EBIT between two financing plans
C. equality of impact on revenue between two financing plans
D. equality of impact on number of shares between two financing plans
90. The minimum rate of return that an investor must receive in order to invest in a project is
most likely known as the:
A. Required rate of return.
B. Inflation rate
C. Real risk-free interest rate.
D. Rate of return

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