Leadstar College of Management and Leadership

Faculty of Business and Leadership

MSc in Accounting and Finance
And
MBA Program
Open Book Final Exam of Financial Management
Full Name_______Mistere Baye_______________IdNo_____MBA12/192_____
Modality________Section______
General Instructions For this Open Book Exam
•
• Write the required information’s
• Maximum mark allotted: 50%
• Feedback provided to the email provided by the college on or before the time allowed.

PART I: Choose the best answer and write at the blank space (2% Each=30%)

• Risk and return Which of the following are Economic variables that help define and
explain the discipline of finance?

• Risk and return

• Capital structure

• Inflation

• All of the above.

• Wealth maximization The most important goal of financial management is:

•
• Profit maximisation

• Matching income and expenditure

• Using business assets effectively

• Wealth maximisation.
• Net present value While evaluating capital investment proposals, time value of money
is used in which of the following techniques,

• Payback method
• Accounting rate of return
• Net present value
• None of the above

• Time value of money is an important finance concept because:

•
• It takes risk into account
• It takes time into account
• It takes compound interest into account
• All of the above.

• There is an optimum capital structure. One The traditional approach towards the
valuation of a company assumes that:

• The overall capitalization rate holds constant with changes in financial leverage.

• There is an optimum capital structure.

• Total risk is not altered by changes in the capital structure.

• Markets are perfect.

• None

• The pay back technique is especially useful during times

• When the value of money is turbulent
• When there is no inflation
• When the economy is growing at a steady rate coupled with minimal inflation.
• None of the above
• A capital budgeting technique which does not require the computation of cost of
capital for decision making purposes is,
• Net Present Value method
• Internal Rate of Return method
• Modified Internal Rate of Return method
• Pay back
• One difference between a financial lease and operating lease is that:

• There is often a call option in a financial lease.

 • There is often an option to buy in an operating lease.

• An operating lease is often cancellable by the lessee.

• A financial lease is often cancellable by the lessee

• Accounting rate of return Depreciation is included as a cost in which of the

following techniques,
• Accounting rate of return
• Net present value
• Internal rate of return
• None of the above
•

• The principal reason for the existence of leasing is that:

• Intermediate-term loans are difficult to obtain.

• This is a type of financing unaffected by changes in tax law.

• Companies, financial institutions, and individuals derive different benefits from owning
assets.

• Leasing is a renewable source of intermediate-term funds.

• To say that there is "asymmetric information" in the issuing of common stock or

debt means that:

• Investors have nearly perfect information.

• The markets have nearly perfect information

• Investors have more accurate information than management has.

• Management has more accurate information than investors have.

• All

• If two alternative proposals are such that the acceptance of one shall exclude the
possibility of the acceptance of another then such decision making will lead to,
•
• Mutually exclusive decisions
• Accept reject decisions
• Contingent decisions
 • None of the above

• The concepts of present value and future value are:

•
• Directly related to each other
• Not related to each other
• Proportionately related to each other
• Inversely related to each other.

• If you have Birr1000 and you plan to save it for 4 years with an interest rate of
10%, what is the future value of your savings?
•
• Birr 1464.00
• Birr 1000.00
• Birr 1331.00
• Cannot be determined.

• Earnings after Interest and Tax is Birr 20 crore, interest is Birr 4 crore, Income
Tax is Birr 16 crore, Interest Coverage Ratio would be:

• 10

• 9

• 7.5

• 5
PART II: DISCUSSION QUESTIONS (5% Each=10)
• What does financial statement analysis mean and for what purpose the managers need it?
Compare and contrast the tools of financial statement analysis. Discuss the importance and
demerits of financial statement analysis.
 Financial statement analysis: - is the process of analyzing a company's financial
statements for decision-making  purposes. External stakeholders use it to understand the
overall health of an organization as well as to evaluate financial performance and
business value
 For what purpose the managers need it: - It helps to manager to understand key facts
about the performance and disposition of a business and may influence decisions.
Financial Statements uses for the purpose of managing the affairs of the company by
assessing its financial performance and position and taking important business decisions
 Compare and contrast the tools of financial statement analysis

 The importance of financial statement analysis

 The importance of share holders :- they may have to take decisions whether they have to
continue with the holdings of the company's share or sell them out. The financial
statement analysis is important as it provides meaningful information to the shareholders
in taking such decisions
 Decisions And Plans :-The management of the company is responsible for taking
decisions and formulating plans and policies for the future. They, therefore, always need
to evaluate its performance and effectiveness of their action to realize the company's
goal in the past. For that purpose, financial statement analysis is important to the
company's management.
  Extension Of Credit :-The creditors are the providers of loan capital to the company.
Therefore they may have to take decisions as to whether they have to extend their loans
to the company and demand for higher interest rates. The financial statement analysis
provides important information to them for their purpose.
 Investment Decision:- The prospective investors are those who have surplus capital to
invest in some profitable opportunities. Therefore, they often have to decide whether to
invest their capital in the company's share. The financial statement analysis is important
to them because they can obtain useful information for their investment decision making
purpose
 Disadvantage of financial statement analysis is that the data and figures are based
on the market at that given time. Depending on the market, it may change quickly, so
executives should not assume that the numbers from a previous financial statement  will
remain the same or increase.

• Clearly discuss what you understand about capital budgeting and justify why we need them.
What was the main reason why the activities of Capital Budgeting become very critical?
Discuss the role of risk and return issues capital budgeting scenarios. Discuss about the
techniques of Capital Budgeting Analysis and identify their merit and demerits.
PART III: WORK OUT PART (5% Each=10)
• Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit
(CD) that pays 4%interest, compounded annually. How much will you have when the CD
matures? How would your answer change if the interest rate were 5%, or 6%, or 20%
respectively?
• Assume Project A has a present value of net cash inflows of $79,600 and an initial
investment of $60,000. Project B has a present value of net cash inflows of $82,500 and
an initial investment of $75,000. Assuming the projects are mutually exclusive, which
project should management select? Justify your answer through work out.