Addis Ababa University

College of Business and Economics

Department of Accounting and Finance
Mid Exam Financial Management I
Time Allowed: 1:20 hrs
Name I.D.No.
Section programme __________

1. Briefly discuss the two basic goal of financial management including its advantage and
disadvantages if any (5 pts).

a. Profit maximization: maximizing birr values (2.5 pts)

b. Wealth maximization: maximizing the values of a share (2.5 pts)

2. ABC Company reported the following information for the year ended June 30, 2008.
ABC Company
Income Statement (in $ 000s)
2008
Net sales $2,110,965
Cost of goods sold 1,459,455
Selling and administrative expenses 312,044
Nonrecurring expenses 27,215
Earnings before interest, taxes, depreciation and amortization
$ 312,251
(EBITDA)
Depreciation 112,178
Earnings before interest and taxes (EBIT) $ 200,073
Interest expense 117,587
Earnings before taxes (EBT) $ 82,486
Taxes (35%) 28,870
Net income $ 53,616

ABC Company
Balance Sheet for Year Ended June 30, 2008 (in $ 000s)

Assets Liabilities and Stockholders’ Equity

Cash and marketable securities $ 396,494 Accounts payable $ 817,845
Accounts receivable 708,275 Notes payable 101,229
Inventories 1,152,398 Accrued income taxes 41,322
Other current assets 42,115
Total current assets $2,299,282 Total current liabilities $ 960,396
Net plant and equipment 1,978,455 Long-term debt 1,149,520
Total liabilities $2,109,916
Common stock 1,312,137
Retained earnings 855,684
Total common equity $2,167,821

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 Total liabilities and stockholders’
Total assets $4,277,737 equity $4,277,737

Required: Using the 2008 data above for ABC Company, calculate the following liquidity
ratios (10 pts): ……… 1 pts each

a. Current ratio
Answer:__________________

$2,299,282
Current ratio = =2. 39 times
$960,396

b. Inventory turnover ratio

Answer:__________________

Inventory turnover ratio $1,459/455 / $1,152,398 1.27

c. Average collection period

Answer:__________________

$708,275 / ($2,110,965/365) 122.5 days

d. Fixed asset turnover

Answer:__________________

Fixed asset turnover $2,110,965 / $1,978,455 1.07

e. Total debt ratio

Answer:__________________

Total debt ratio $2,109,916 / $4,277,737 0.493

f. Net profit margin

Answer:__________________

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Net Profit margin = Net income / Sales = $ 53,616 / $2,110,965 = 2.54%

g. Times interest earned ratio

Answer:__________________

$200,073 / $117,587 1.7

h. Return on Asset
Answer:__________________

Return on assets = Net income / Total assets = $ 53,616 / $4,277,737= 1.25%

i. Earnings per share (no of common share outstanding 50,000)

Answer: $ 53,616 / 50,000= 1.072

j. Price earnings ratio (market price per share $100)

Answer: $ 100 / 1.072= 93.28

3. By referring to the above financial statements, prepare projected balance sheet by

taking in to considerations the following additional Information (10 pts):

The firm operated at full capacity in 2001. It expects sales to increase by 20 percent during
2009 and expects 2009 dividends per share to increase to $1.10.
Required:
Use the projected financial statement method to determine how much outside
financing is required, developing the firm’s pro forma balance sheet, and use AFN as
the balancing item. The financial staff of ABC Company, after considering all of the
relevant factors, decided on the following financing mix to raise the additionally
needed fund:

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 SOURCE OF CAPITAL PERCENTAGE AMOUNT INTEREST RATE
OF NEW CAPITAL
Notes payable 25% 8%
Long-term debt 25 10
Common stock 50
Total 100%

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Answer sheet: (1 pts each)
ABC Company
Balance Sheet for Year Ended June 30, 2008 (in $ 000s)

Assets Liabilities and

Stockholders’ Equity
Cash and marketable 475,792.80 Accounts payable 981,414.00
securities
Accounts receivable 849,930.00 Notes payable
Inventories 1,382,877.60 Accrued income taxes 49,586.40
Other current assets 50,538.00
Total current assets 2,759,138.40 Total current liabilities
Net plant and equipment 2,374,146.00 Long-term debt
Total liabilities
Common stock
Retained earnings
Total common equity
5,133,284.4 Total liabilities and
Total assets stockholders’ equity

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