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: Frewoynie G/Mednin Id No. : MBA/246/12 Modality: MBA Section: D
General Instructions For this Open Book Exam
Write the required information’s Feedback provided to the email provided by
Maximum mark allotted: 50% the college on or before the time allowed.
PART I: Choose the best answer and write at the blank space (2% Each=30%)
1. D Which of the following are Economic variables that help define and explain the
discipline of finance?
A. Risk and return C. Inflation
B. Capital structure D. All of the above.
2. The most important goal of financial management is:
A. Profit maximisation C. Using business assets effectively
B. Matching income and D. Wealth maximisation.
expenditure
3. G While evaluating capital investment proposals, time value of money is used in which
of the following techniques,
E. Payback method G. Net present value
F. Accounting rate of return H. None of the above
4. D Time value of money is an important finance concept because:
A. It takes risk into account C. It takes compound interest into account
B. It takes time into account D. All of the above.
5. A One The traditional approach towards the valuation of a company assumes that:
A. The overall capitalization rate holds constant with changes in financial leverage.
B. There is an optimum capital structure.
C. Total risk is not altered by changes in the capital structure.
D. Markets are perfect.
E. None
6. B The pay back technique is especially useful during times
A. When the value of money is turbulent
B. When there is no inflation
C. When the economy is growing at a steady rate coupled with minimal inflation.
D. None of the above
7. A capital budgeting technique which does not require the computation of cost of
capital for decision making purposes is,
A. Net Present Value method
B. Internal Rate of Return method
C. Modified Internal Rate of Return method
Page 1 of 3
D. Pay back
8. One difference between a financial lease and operating lease is that:
A. There is often a call option in a financial lease.
B. There is often an option to buy in an operating lease.
C. An operating lease is often cancellable by the lessee.
D. A financial lease is often cancellable by the lessee
9. Depreciation is included as a cost in which of the following techniques,
A. Accounting rate of return C. Internal rate of return
B. Net present value D. None of the above
10. The principal reason for the existence of leasing is that:
A. Intermediate-term loans are difficult to obtain.
B. This is a type of financing unaffected by changes in tax law.
C. Companies, financial institutions, and individuals derive different benefits from owning assets.
D. Leasing is a renewable source of intermediate-term funds.
11. To say that there is "asymmetric information" in the issuing of common stock or debt
means that:
A. Investors have nearly perfect information.
B. The markets have nearly perfect information
C. Investors have more accurate information than management has.
D. Management has more accurate information than investors have.
E. All
12. 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,
A. Mutually exclusive decisions C. Contingent decisions
B. Accept reject decisions D. None of the above
13. A The concepts of present value and future value are:
A. Directly related to each other C. Proportionately related to each other
B. Not related to each other D. Inversely related to each other.
14. A 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?
A. Birr 1464.00 D. Cannot be determined.
B. Birr 1000.00
C. Birr 1331.00
15. 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:
A. 10 C. 7.5
B. 9 D. 5
Page 2 of 3
PART II: DISCUSSION QUESTIONS (5% Each=10)
1. 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.
2. 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)
1. 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?
2. 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.
Page 3 of 3
PART II: DISCUSSION QUESTIONS
Financial Statement Analysis
Financial statement analysis is the process of analyzing a company's financial statements for decision-
making purposes.
The purpose of financial statement analysis is to examine past and current financial data so that a
company's performance and financial position can be evaluated and future risks and potential can be
estimated.
Some of important tools of financial statement analysis are as follows:
1. Comparative Statements
Comparative statements deal with the comparison of different items of the Profit and Loss Account
and Balance Sheets of two or more periods. Separate comparative statements are prepared for Profit
and Loss Account as Comparative Income Statement and for Balance Sheets.
2. Comparative Income Statement
Three important information are obtained from the Comparative Income Statement. They are Gross
Profit, Operating Profit and Net Profit. The changes or the improvement in the profitability of the
business concern is find out over a period of time. If the changes or improvement is not satisfactory,
the management can find out the reasons for it and some corrective action can be taken.
3. Comparative Balance Sheet
The financial condition of the business concern can be find out by preparing comparative balance
sheet. The various items of Balance sheet for two different periods are used. The assets are classified
as current assets and fixed assets for comparison. Likewise, the liabilities are classified as current
liabilities, long term liabilities and shareholders’ net worth. The term shareholders’ net worth includes
Equity Share Capital, Preference Share Capital, Reserves and Surplus and the like.
4. Trend Analysis
Page 4 of 3
The ratios of different items for various periods are find out and then compared under this analysis.
The analysis of the ratios over a period of years gives an idea of whether the business concern is
trending upward or downward. This analysis is otherwise called as Pyramid Method.
5. Cash Flow Analysis
Cash flow analysis is based on the movement of cash and bank balances. In other words, the
movement of cash instead of movement of working capital would be considered in the cash flow
analysis. There are two types of cash flows. They are actual cash flows and notional cash flows.
6. Ratio Analysis
Ratio analysis is an attempt of developing meaningful relationship between individual items (or group
of items) in the balance sheet or profit and loss account. Ratio analysis is not only useful to internal
parties of business concern but also useful to external parties. Ratio analysis highlights the liquidity,
solvency, profitability and capital gearing.
The importance and demerits of financial statement analysis
Importance
The most important benefit of financial statement analysis is that it provides an idea to the investors
about deciding on investing their funds in a particular company.
Another advantage of financial statement analysis is that regulatory authorities like IASB can ensure
the company following the required accounting standards.
Financial statement analysis is helpful to the government agencies in analyzing the taxation owed to
the firm.
Above all, the company is able to analyze its own performance over a specific time period
Demerits
Page 5 of 3
One disadvantage of using financial statements for decision making is that the data and figures are
based on the market at that given time
Another disadvantage is that a single financial statement only shows how a company is doing at one
single time.
2. Capital Budgeting
Capital budgeting is the process a business undertakes to evaluate potential major projects or
investments. It involves choosing projects that add value to a company. The capital budgeting process
can involve almost anything including acquiring land or purchasing fixed assets like a new truck or
machinery.
Purpose
Used by companies to evaluate major projects and investments, such as new plants or equipment.
used to determine an organization's long term investments
Why the activities of Capital Budgeting become very critical?
The activities of capital budgeting are as important as large sums of money are involved, which
influences the profitability of the firm. Plus, a long-term investment, once made, cannot be reversed
without significant loss of invested capital. Activities of capital budgeting is very obviously a vital
activity in business. Vast sums of money can be easily wasted if the investment turns out to be wrong
or uneconomic. The subject matter is difficult to grasp by nature of the topic covered and also
because of the mathematical content involved. However, it seeks to build on the concept of the future
value of money which may be spent now. It does this by examining the techniques of net present
value, internal rate of return and annuities.
Page 6 of 3
