Financial management I model exit exam questions and answer
Academic year, 2016
Finance is about:
A. Managing people
B. Managing the assets and equities of a firm
C. Managing the sources and uses of funds firms and individuals
D. All except „a‟
ANSWER D
One of the following is not part of the field of finance:
A. Investment
B. Financial market and institutions
C. Corporate finance
D. None
ANSWER D
Which of the following is very common responsibility of a financial manager of a firm?
A. Making major investment and financing decisions of a firm
B. Managing the risk of a firm
C. Gathering and reporting financial performance of a firm to outsiders through financial
statements
D. A and B
ANSWER D
A market for short-term debt securities is usually known as:
A. Money market
B. Capital market
C. Physical asset market
D. None of the above
ANSWER A
One of the following is an advantage of financial markets and financial institutions in a particular
economy:
A. A forum for savers and demanders of funds to meet and execute borrowing and lending
transactions
B. A means of pooling risk
C. Provides liquidity to investors
D. All of the above
ANSWER D
Which of the following factor generally increases interest rate?
A. Increase in default risk
B. Increase in real risk-free rate of return
C. Increase in the general consumer price index
D. All of the above
ANSWER D
A financial management decision that deals with the mix of debt and equity financing of the
needs of a firm is:
A. Investing and financing decisions
B. Capital structure decisions
C. Working capital decisions
D. All of the above
ANSWER B
Profit maximization, as the goal of a firm is inappropriate for which of the following reasons?
A. Ignores EPS and focuses on total profit of a firm
B. Disregard the fact that risk drives return
C. Ignores the size of funds disbursed to stockholders as dividends
D. All of the above
ANSWER D
Financial ratios are used for one or more of the following purposes except:
A. Making an assessment of credit worthiness of a firm
B. Evaluating firm‟s main competitor‟s financial performance
C. Assessing firm‟s present financial performance and future prospect
D. All of the above
ANSWER B
A kind of financial analysis used to make comparison between a firm and many other firms in a
particular year is known as:
A. Benchmark analysis
B. Cross-sectional analysis
C. Time series analysis
D. All of the above
E. None of the above
ANSWER A
Which one is the most conservative measure of firm‟s short-term solvency:
A. Current ratio
B. Cash ratio
C. Quick ratio
D. All
ANSWER D
A more comprehensive measure of firm‟s ability to service its debt is:
A. Total debt ratio
B. Interest coverage ratio
C. Fixed charge coverage ratio
D. All of the above
E. None of the above
ANSWER D
Which of the following is the most direct measure of firm‟s asset use efficiency?
A. Profit margin
B. Equity multiplier
C. Total asset turn over
D. Return on asset
E. None of the above
ANSWER D
Based on the following data, answer questions 14 to 17 below.
ZEMENAY Company reported the following data for 2022:
Net Profit Margin 10%
Total Asset Turnover 4
Total Debt Ratio 60%
Credit sales Birr 2,920,000
Average Accounts Receivable Birr 160,000
Cost of Goods Sold Rate 40%
Day‟s sales in inventory 15 days
What is the return on asset (ROA)?
A. 24%
B. 40%
C. 60%
D. 120%
ANSWER B
What is the return on equity (ROE)?
A. 100%
B. 80%
C. 120%
D. 150%
E. . None of the above
ANSWER A
What is the average collection period for credit sales?
A. 30 days
B. 45 days
C. 20 days
D. 25 days
E. None of the above
ANSWER C
What is the average inventory of the year 2022?
A. Birr 48,000
B. Birr 96,000
C. Birr 100,000
D. Birr 72,000
E. None of the above
ANSWER A
Which of the following measure is superior over the others in evaluating the performance of
management in terms of maximizing the wealth of firm owners in a particular year?
A. Return on equity
B. Market value added
C. Economic value added
D. Return on asset
E. None of the above
ANSWER A
The future value of an investment would be the lowest when:
A. Both the compounding period and rate increase
B. Compounding period increases while the interest rate decreases
C. Both the compounding period and rate decrease
D. Compounding period decreases while the interest rate increases
E. None of the above
ANSWER D
You have a house that can be rented for Birr12,000 annual end of year payments for the coming
20 years, which is the expected life of the house. If your existing bank saving account pays you 4
percent return per year, how much price should you be offered today from a buyer of a house for
you to be indifferent between renting or selling the house?
A. 163,083.60
B. 140, 000.80
C. 169,606.94
D. 150,000.00
E. None of the above
ANSWER A
Considering the information in question above except that your house cannot be begin renting
and remain idle until after five years from today (the renting would occur in the sixth year and
onwards for of twenty years), what selling price for the house would make you indifferent?
A. 187,465.20
B. 109,662.00
C. 187,465.20
D. 133,420.60
E. None of the above
ANSWER D
How long will it take for Birr 10,000 investment made today to grow to Birr 19,672 at a rate of
return of 7 percent per year?
A. 10 years
B. 8 years
C. 12 years
D. Can‟t be determined
E. None of the above
ANSWER A
If a building is purchased for Birr 500,000 and expected to be sold for Birr 701,300 after five
years, what is the expected rate of return on your investment?
A. 6 percent
B. 9 percent
C. 7 percent
D. 7.5 percent
E. None of the above
ANSWER C
You approached a bank to borrow money for business purpose. After careful review of your
creditworthiness, the bank offered to lend you the required sum of money that is to be paid after
five years with interest rate of 8% compounded quarterly. What is the effective annual rate that
you will be paying on this loan?
A. 8%
B. 2%
C. 9.52%
D. 8.24%
E. None of the above
ANSWER A
Identify the correct statement
A. A risk of an asset caused by factors such as war, inflation, high interest rate is systematic
risk
B. Diversification helps minimize or even eliminate the systematic portion of the total risk
C. Any where an investor could go, the UN systematic risk can't be escaped
D. Increasing the number of randomly selected assets in a portfolio reduces the level of
systematic risk practically to zero.
E. None of the above
ANSWER A
An investor has two assets, A and B, with the following details.
Spot the correct statement about these two assets
A. Asset A has greater total risk
B. Asset B has greater total risk
C. Asset A will have higher risk premium
D. Asset A will have greater required return
E. None of the above
ANSWER B
The following data pertain to asset X
sx = 10%, sm = 15%, rxm = 0.8, KRF = 8%. Km = 12%
The required rate of return on asset X is
A. 10.13 %
B. 8%
C. 12%
D. 12.8 %
E. None of the above
ANSWER A
IF sx = 10%, sm = 15%, rxm = 0.8, KRF = 8%. Km = 12%
If the market return increases by 25 %, which one of these assets would lose most?
A. Asset D
B. Asset B
C. Asset E
D. Asset C
E. Assets D and E
ANSWER E
If the investor were certain that the market would decrease in the future, which asset would be
the most preferred?
A. Asset D
B. Asset B
C. Asset E
D. Asset C
E. Assets D and E
ANSWER B
Find the wrong statement about portfolio
A. The expected portfolio return is simply a weighted average of the individual assets'
expected returns
B. Portfolio risk is a weighted average of the individual security's standard deviations
C. Portfolio beta is a measure of the market risk of a portfolio
D. All of the above
E. None of the above
ANSWER E
You have been given the following historical return data on three assets – A, B, and C, – over
the period 2019-2021. Answer questions 8 and 9 based on these data.
Expected Rate of Return (%)
Year Asset A Asset B Asset C
2019 18 11 17
2020 16 16 18
2021 20 18 16
The most risky asset is
A. Asset A
B. Can't be determined
C. Asset B
D. None of the above
E. Asset C
ANSWER C
The asset that has yielded the most benefit per unit of risk to the investor is
A. Asset A
B. Can't be determined
C. Asset B
D. Asset C
ANSWER D
Which one of the following statement is not true about the cost of capital of a firm?
A. The minimum rate of return a firm must earn to satisfy the overall rate of return required
by its investors.
B. The “hurdle rate” with which firm‟s long-term investment projects are evaluated.
C. The minimum rate of return a firm must earn on invested capital if its market value
should remain unchanged.
D. The value of a firm increases when it earns on invested capital a rate of return greater
than the cost of capital.
E. None of the above
ANSWER E
Assuming the existence of flotation costs, which of the following list includes financing sources
from the least to the most expensive for a firm?
A. Debt, new common stock, preferred stock, and retained earnings
B. Debt, preferred stock, retained earnings, and new common stock
C. New common stock, retained earnings, preferred stock, and debt
D. Preferred stock, new common stock, retained earnings, and debt
E. None of the above
ANSWER B
As part of its effort of raising enough funds for an upcoming project, DuDu Company plans to
sell 1000 shares of preferred stock at a price of Br 120 per share that pays Br 8.55 dividend per a
share every year and it anticipates paying flotation costs of 5%. What is the component cost of
preferred stock of DuDu Company?
A. 7.487%
B. 8.55%
C. 7.1%
D. 12%
E. None of the above
ANSWER A
A firm has common stock that currently sells for Br 50 per share. The most recent dividend paid
by the firm to common stockholders is Br 2 per share. If the firm‟s dividend is expected to grow
at a constant rate of 5%, what is the cost of the firm‟s common equity?
A. 10%
B. 7%
C. 11%
D. 9.2%
E. None of the above
ANSWER D
Which of the following statements are incorrect?
A. The cost of new common equity and the cost of retained earnings are in the absence of
flotation costs.
B. Flotation costs when adjusted to the upfront cost a project it increases the cost of the
project in question and its internal rate of return
C. The weighted average cost of capital of a firm is used to evaluate all kinds of projects a
firm considers to undertake.
D. The firm‟s cost of capital is affected by its capital structure.
E. None of the above
ANSWER E
A technique for adjusting the WACC for project‟s risk differential that attempts to determine a
projects beta as the average of the betas of similar companies to the project evaluated know as:
A. Risk classification method
B. Accounting beta method
C. Pure play method
D. All except „a‟
ANSWER C
Factors that influence the cost of capital of a firm but that are not controllable by a particular
firm include:
A. Investment and dividend policy
B. Capital structure and dividend policy
C. The level of interest rate and tax rates
D. Investment policy and tax rates
E. None of the above
ANSWER C
The market value approach in measuring the mix of debt and equity in a firm‟s capital structure
is condemned for which of the following limitation?
A. It produces a historical cost of capital that is inappropriate in evaluating current projects
B. It produces a ridged capital structure that is unrealistic
C. It produces unstable capital structure that is difficult to monitor as market values are
constantly changing
D. All of the above
E. None of the above
ANSWER C
One of the following is not true about capital budgeting:
A. Capital budgeting is the process of identifying, evaluating, selecting, and implementing
long-term investment opportunities
B. Capital budgeting involves investments on in tangible assets only
C. The selection and implementation of long-term projects that are consistent to the business
strategy of the firm and that add to the value of the firm
D. All of the above
E. None of the above
ANSWER B
An important phase in the capital budgeting process that involves an analysis of the economic
viability of the project in question is:
A. The proposal or idea generation phase
B. The decision making phase
C. The review and analysis phase
D. The implementation phase
E. None of the above
ANSWER C
Projects that serve same purpose and compete for same resources are:
A. Independent projects
B. Mutually exclusives projects
C. Complementing projects
D. A and b
ANSWER B
IF You have two mutually exclusive projects: Project A and Project B. Your firm‟s cost of
capital is 10%. The initial investment of these projects and subsequent cash inflows that occur
uniformly throughout each year are summarized below:
Year Project A Project B
0 -2,000 -2,000
1 400 1000
2 500 800
3 800 600
4 900 200
What is the payback period of Project A and Project B respectively?
A. 3.33 and 2.33 years
B. 3.5 and 3.0 years
C. 4.0 and 4.0 years
D. 4.0 and 3.0 years
ANSWER A
IF You have two mutually exclusive projects: Project A and Project B. Your firm‟s cost of
capital is 10%. The initial investment of these projects and subsequent cash inflows that occur
uniformly throughout each year are summarized below:
Year Project A Project B
0 -2,000 -2,000
1 400 1000
2 500 800
3 800 600
4 900 200
What is the NPV of Project A and Project B respectively?
A. 600 and 600
B. 75.78 and -45.24
C. -7.42 and 157.6
D. 73.34 and 157.52
ANSWER D
IF You have two mutually exclusive projects: Project A and Project B. Your firm‟s cost of
capital is 10%. The initial investment of these projects and subsequent cash inflows that occur
uniformly throughout each year are summarized below:
Year Project A Project B
0 -2,000 -2,000
1 400 1000
2 500 800
3 800 600
4 900 200
Which project appears to be more attractive based on payback and NPV criteria respectively?
A. Project B and Project A
B. Project A and Project B
C. Both chose project B
D. Both chose project A
E. None of the above
ANSWER C
One of the following weaknesses is not attributable to Average Accounting Rate of Return:
A. It doesn‟t use cash flows
B. It ignores time value of money
C. It has no objective decision criteria
D. It doesn‟t tell about the impact of a project on shareholder wealth
E. None of the above
ANSWER C
You have a project with initial investment of Birr 43,553 and expected to generate, annual cash
inflow of Birr 10,000 in the coming six years. What is the IRR of the project?
A. 10%
B. 11%
C. 15%
D. 19.36%
ANSWER A
Accounting Ratios are important tools used by
A. Managers,
B. Researchers,
C. Investors,
D. All of the above
ANSWER A
Net Profit Ratio Signifies:
A. Operational Profitability,
B. Liquidity Position,
C. Big-term Solvency,
D. Profit for Lenders.
ANSWER A
Working Capital Turnover measures the relationship of Working Capital with:
A. Fixed Assets,
B. Sales,
C. Purchases,
D. Stock.
ANSWER B
In Ratio Analysis, the term Capital Employed refers to:
A. Equity Share Capital,
B. Net worth,
C. Shareholders' Funds,
D. None of the above.
ANSWER A
Dividend Payout Ratio is:
A. PAT Capital,
B. DPS ÷ EPS,
C. Pref. Dividend ÷ PAT,
D. Pref. Dividend ÷ Equity Dividend.
ANSWER B
DU PONT Analysis deals with:
A. Analysis of Current Assets,
B. Analysis of Profit,
C. Capital Budgeting,
D. Analysis of Fixed Assets.
ANSWER B
In Net Profit Ratio, the denominator is:
A. Net Purchases,
B. Net Sales,
C. Credit Sales,
D. Cost of goods sold.
ANSWER B
Inventory Turnover measures the relationship of inventory with:
A. Average Sales,
B. Cost of Goods Sold,
C. Total Purchases,
D. Total Assets.
ANSWER B
Return on Investment may be improved by:
A. Increasing Turnover,
B. Reducing Expenses,
C. Increasing Capital Utilization,
D. All of the above.
ANSWER D
There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
A. That the Capital Employed has reduced,
B. That the Profitability has gone up,
C. That debtors collection period has increased,
D. That Sales has decreased.
ANSWER C
Which of the following does not help to increase Current Ratio?
A. Issue of Debentures to buy Stock,
B. Issue of Debentures to pay Creditors,
C. Sale of Investment to pay Creditors,
D. Avail Bank Overdraft to buy Machine.
ANSWER D
Debt to Total Assets Ratio can be improved by:
A. Borrowing More,
B. Issue of Debentures,
C. Issue of Equity Shares,
D. Redemption of Debt.
ANSWER D
In capital budgeting, the term Capital Rationing implies:
A. That no retained earnings available,
B. That limited funds are available for investment,
C. That no external funds can be raised,
D. That no fresh investment is required in current year
ANSWER B
Feasibility Set Approach to Capital Rationing can be applied in:
A. Accept-Reject Situations,
B. Divisible Projects,
C. Mutually Exclusive Projects,
D. None of the above
ANSWER D
In case of divisible projects, which of the following can be used to attain maximum NPV?
A. Feasibility Set Approach,
B. Internal Rate of Return,
C. Profitability Index Approach,
D. Any of the above
ANSWER A
In case of the indivisible projects, which of the following may not give the optimum result?
A. Internal Rate of Return,
B. Profitability Index,
C. Feasibility Set Approach,
D. All of the above
ANSWER C
Profitability Index, when applied to Divisible Projects, impliedly assumes that:
A. Project cannot be taken in parts,
B. NPV is linearly proportionate to part of the project taken up,
C. NPV is additive in nature,
D. Both (b) and (c)
ANSWER D
If there is no inflation during a period, then the Money Cash flow would be equal to:
A. Present Value,
B. Real Cash flow,
C. Real Cash flow + Present Value ,
D. Real Cash flow - Present Value
ANSWER B
The Real Cash flows must be discounted to get the present value at a rate equal to:
A. Money Discount Rate,
B. Inflation Rate,
C. Real Discount Rate,
D. Risk free rate of interest
ANSWER C
Real rate of return is equal to:
A. Nominal Rate × Inflation Rate,
B. Nominal Rate ÷ Inflation Rate,
C. Nominal Rate - Inflation Rate,
D. Nominal Rate + Inflation Rate
ANSWER C
Cost of Capital refers to:
A. Flotation Cost,
B. Dividend,
C. Required Rate of Return,
D. None of the above.
ANSWER C
Which of the following sources of funds has an Implicit Cost of Capital?
A. Equity Share Capital,
B. Preference Share Capital,
C. Debentures,
D. Retained earnings.
ANSWER A
Which of the following has the highest cost of capital?
A. Equity shares,
B. Loans,
C. Bonds,
D. Preference shares.
ANSWER A
Cost of Capital for Government securities is also known as:
A. Risk-free Rate of Interest,
B. Maximum Rate of Return,
C. Rate of Interest on Fixed Deposits,
D. None of the above.
ANSWER A
Cost of Capital for Bonds and Debentures is calculated on:
A. Before Tax basis,
B. After Tax basis,
C. Risk-free Rate of Interest basis,
D. None of the above.
ANSWER A
Which of the following cost of capital require tax adjustment?
A. Cost of Equity Shares,
B. Cost of Preference Shares,
C. Cost of Debentures,
D. Cost of Retained Earnings.
ANSWER C
Which is the most expensive source of funds?
A. New Equity Shares
B. New Preference Shares
C. New Debts
D. Retained Earnings.
ANSWER A
Marginal cost of capital is the cost of:
A. Additional Sales,
B. Additional Funds,
C. Additional Interests,
D. None of the above.
ANSWER A
Firm's Cost of Capital is the average cost of:
A. All sources,
B. All borrowings,
C. Share capital,
D. Share Bonds & Debentures.
ANSWER A
An implicit cost of increasing proportion of debt is:
A. Tax should would not be available on new debt,
B. P.E. Ratio would increase,
C. Equity shareholders would demand higher return,
D. Rate of Return of the company would decrease.
ANSWER C
Cost of Redeemable Preference Share Capital is:
A. Rate of Dividend,
B. After Tax Rate of Dividend
C. Discount Rate that equates PV of inflows and out-flows relating to capital
D. None of the above.
ANSWER C
Which of the following is true?
A. Retained earnings are cost free
B. External Equity is cheaper than Internal Equity
C. Retained Earnings are cheaper than External Equity
D. Retained Earnings are costlier than External Equity.
ANSWER C
Cost of capital may be defined as:
A. Weighted Average cost of all debts,
B. Rate of Return expected by Equity Shareholders,
C. Average IRR of the Projects of the firm,
D. Minimum Rate of Return that the firm should earn.
ANSWER D
Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known as:
A. Average Return on Investment,
B. Weighted Average Cost of Capital,
C. Net Profit Ratio,
D. Average Cost of borrowing.
ANSWER B
Cost Capital for Equity Share Capital does not imply that:
A. Market Price is equal to Book Value of share,
B. Shareholders are ready to subscribe to right issue,
C. Market Price is more than Issue Price
D. AC of the three above.
ANSWER A
The term capital structure denotes:
A. Total of Liability side of Balance Sheet,
B. Equity Funds, Preference Capital and Long term Debt,
C. Total Shareholders‟ Equity,
D. Types of Capital Issued by a Company.
ANSWER B
Debt Financing is a cheaper source of finance because of:
A. Time Value of Money,
B. Rate of Interest,
C. Tax-deductibility of Interest,
D. Dividends not Payable to lenders.
ANSWER C
Advantage of Debt financing is:
A. Interest is tax- deductible,
B. It reduces WACC,
C. Does not dilute owners control,
D. All of the above.
ANSWER A
The concept of Financial management is
A) Profit maximization
B) All features of obtaining and using financial resources for company operations
C) Organization of funds
D) Effective Management of every company
Answer: B
Why money received today is worth more than a money received tomorrow?
A. A money received in the future can be invested to earn interest
B. Due to money's potential to decline in value over time
C. Money that's available in the present is considered more valuable than the same amount in the
future
D. There is no relation between inflation and money value
ANSWER: C
The capital budget is associated with.
A) Long terms and short terms assets
B) Fixed assets
C) Long terms assets
D) Short term assets
Answer: C
Which of the following is not true about Capital Budgeting?
A. Capital Budgeting decisions have an influence on the future stability of an organisation
B. Capital Budgeting decisions include investments to expand the business
C. Capital Budgeting decisions are of an irreversible nature
D. Sunk cost is a part of Capital Budgeting
ANSWER: D
The current ratio can be numerically expressed in the form of the following equation:-
A. Current ratio = Current assets – current liabilities
B. Current ratio = Current assets + current liabilities
C. Current ratio = Current assets / current liabilities
D. Current ratio = Current assets * current liabilities
ANSWER: C
From the following data, calculate the liquid ratio:-
Current Assets = 50,000 ; Current Liabilities = 20,000 ; Inventory = 13,000 ; Prepaid Expenses =
1,000.
A.1:1
B.1.8:1
C.1:1.8
D.1.5:1
ANSWER: B
A stock has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is
5 percent. What must the expected return on this stock be?
A. 16% C. 18.5%
B. 14% D. 15%
ANSWER: C
What amount will be accumulated if we deposit $5,000 at the end of each year for the next 5
years? Assume an interest of 6% compounded annually.
A. 28,185.46
B. 29,876.59
C. 26,732.43
D. 25, 478.90
ANSWER: A
