FM 1-Final Exam-2015 Royal

Name_______________________ Financial Management
Id. No._________ Final Exam

Section_________
PART I: TRUE /FALSE ITEM
Write ‘true’ if the given statement is ‘correct’ & write ‘false’ if it is ‘incorrect’ (1pt each)
1. Capital budgeting is a short range planning.
2. In capital budgeting decisions the word annual income and annual cash flows are more or
less synonymous.
3. Future value is equivalent to PV + PV * Rate of Interest.
4. As long as NPV > Zero accept the project.
5. Internal rate of return is nothing but the rate of interest, which equates the present value of
future earnings with present investment.
Part II: Choose the correct answer from the given alternatives and write the choice of
your letters on the answer sheet provided with block letters (2 pts. each)
1. Suppose, you are given an option to receive Birr 1060 after one year which earns 6%
interest. How much you have to invest now?
A. 1000 B. 1020 C. 1060 D. 950
2. Assume that you are the finance manager of a limited company. You have $ 10,000 to invest
in a project. The life of the project is 20 years. The project will generate annual cash flows
of $ 2,400 per year. What will be the net present value?
A. $ 5,434 B.$ 15,434 C. $ 20,434 D. $ 10,434
3. You are considering an investment with the following cash flows. Your required return is
8%, you generally require a payback of 3 years and a discounted payback of 4 years. If
your objective is to maximize your wealth, should you take this investment?
Years Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Cash flow -50,000 20,000 20,000 20,000 20,000 -50,000
A. Yes, because the payback is 2.5 years.
B. Yes, because the discounted payback is less than 4 years.
C. Yes, because both the payback and the discounted payback are less than 2 years.
D. No, because the NPV is negative.
E. No, because the project cash flows are not conventional.
4. An NPV of zero implies that an investment _____
A. Has no initial cost C. Creates shareholder wealth
B. Has the sum of the total cash flows D. Destroys shareholder wealth
equal to zero. E. Is immaterial to the shareholder
5. The net present value (NPV) rule can be best stated as:
A. An investment should be accepted if, and only if the NPV is exactly equal to zero.
B. An investment should be rejected if the NPV is positive and accepted if it is negative.
C. An investment should be accepted if the NPV is positive and rejected if it is negative.
D. An investment with greater cash inflows than cash outflows, regardless of when the
cash flows occur, will always have a positive NPV and therefore should always be
accepted.
6. Suppose $ 1,000 deposited in savings bank with commercial Bank of Ethiopia at 5%
interest, what will be the future value after five years?
A. $ 1,076 B. $ 1,176 C. $ 1,276 D. None
7. The capital budgeting decision depends in part on the
A. Availability of funds. C. Risk associated with a particular project.
B. Relationships among proposed projects D. All of these
8. B Company is considering the purchase of a piece of equipment that costs $32,000.
Projected net annual cash flows over the project’s life are:
Name_______________________ Financial Management
Id. No._________ Final Exam
Section_________
Year 1 Year 2 Year 3 Year 4
30,000 8,000 15,000 9,000
What is the payback period? Assuming a discount rate of 12%.

A. 2.68 year C. 2.37 year
B. 2.80year D. None
9. The decision involves determining the appropriate make-up of the right-hand side of
the balance sheet.
A. Asset management C. Investment
B. Financing D. Capital budgeting
10. Financial leverage does not reflect:
A. The firm's commitment to fixed, financial assets,
B. Contribution to earnings 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
E. None of the above
11. Which formula is used to measure the degree of operating leverage?
A. EBT/EBIT C. EBIT/EBT
B. Contribution/EBIT D. EBIT/Contribution
12. High operating leverage indicates a company has:
A. High fixed cost A. Both a & b
B. Low variable cost B. None of the above
13. The extent to which an organization uses fixed cost on its cost structure is called:
C. Overall leverage E. Fixed Leverage
D. Financial leverage F. Operating leverage
14. Degree of operating leverage of 1.5 means:
A. If EBIT increase by 1%, the EPS will increase by 1 %
B. If sales rise by 1%, EBIT will rise by 1.5%
C. If sales rise by 1%, EBIT will remain unaffected
D. All
15. Operating leverage indicates the tendency of operating profits (EBIT) to vary
disproportionately with:
A. Profits C. Sales
B. Fixed cost D. EPS
Part III: Work out (15 points)

1. A five-year project, if undertaken, will require an initial investment of $95,000. The
expected end-of-year cash flows are:
Year 1 Year 2 Year 3 Year 4 Year 5
12,000 39,000 39,000 30,000 18,000
If the appropriate discount rate for the project is 15%, determine the projects’:
a. Net present value (4 marks).
b. Profitability index (2 mark).
c. Payback period (4 marks).
2. What are the external and internal sources of finance? (5 Points)

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Name_______________________ Financial Management

Id. No._________ Final Exam

What is the payback period? Assuming a discount rate of 12%.

Part III: Work out (15 points)

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