JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
FINAL EXAMINATION OF FINANCIAL MANAGEMENT I
FOR 3rd YEAR ACCOUNTING AND FINANCE STUDENTS
Maximum weight: 50 % Time allotted: 2hr
NAME: ___________________________ID NO.: ______________SECTION: ______
GENERAL INSTRUCTIONS:
This exam booklet has Three parts: Part I: True or False questions: Part II Multiple
choice questions Part III: work out questions. Attempt all of them.
Read each instruction carefully and respond to all questions accordingly.
Write your personal information both on question paper and Answer sheet.
Any attempt of cheating on this exam is result in “F” Grade
Using (not sharing) scientific calculator is permissible (course Specific).
Bringing any type of cell phone to the exam room will automatically dismissed you
from the Exam!
DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO BY YOUR
INVIGILATOR!!!
Prepared by Instructor: Getachew A
~~~~~~~~~~~GOOD LUCK!!!~~~~~~~~~~~~~

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 Part I: True or False questions
Instruction: Write “True” if the statement is correct and write “False” if the statement
is incorrect on the separate space provided. (1pt each)
1 The principle of diversification suggests that investing in multiple assets increases risk.
2 Systematic risk can be eliminated through diversification.
3 The cost of preferred stock is more expensive than the cost of debt.
4 The more certain the return expected from an asset, the less the variability, and therefore
the lower the risk.
5 Risk Premium is the excess return required from an investment in a risky asset over that
required from a risk-free investment.
6 The cost of capital serves as a basic for evaluating the financial performance.
7 The company cost of capital is the expected rate of return that investors demand from the
company's assets and operations.
8 Process of computing the present value is referred as compounding.
9 An increase in market interest rate will cause price of an outstanding bond to rise.
10 The weighted cost of capital is the required rate of return that the firm must pay to
generate funds from different sources in the currently exist in the market.
Part II: - Choose the correct answer from the given alternatives and write your
letter of choice (1.5 each)
1. Which of the following is not among the conditions that a series of cash flows to be an
annuity?
A. The cash flows must be equal.
B. The interest rate applied for each period may not be equal.
C. The interval between any two cash flows must be fixed.
D. Interest should be compounded during each period.
2. The principle of diversification suggests that:
A. Investing in a single asset minimizes risk
B. Investing in multiple assets can eliminate all risk
C. Investing in multiple assets reduces risk
D. Investing in multiple assets increases risk
3. Which measure helps evaluate the risk associated with an investment portfolio?
A. Probability distributions C. Portfolio weights
B. Measures of central tendency D. Portfolio risk
4. Interest paid (earned) on both the original principal borrowed (lent) and previous interest
earned is often referred to as:
A. Present value. C. Simple interest.
B. Compound interest. D. Future value.
5. Suppose that Ato Hagos deposited Br. 50, 000 in an account that pays interest of 13%
per year, compounded monthly. Consequently, what would be the compound amount at
the end of one year?
A. Br. 56,901.62 C. Br. 54,900.56
B. Br.57,518.06 D. Br.57,918.06

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6. Which of the following statements is not true about the time value of money?
A. Annuity is a series of equal periodic receipts, payments, withdrawals, or deposits.
B. A sum of money received today is more valuable than the same amount received in
the future.
C. The sum of money received in the future is more valuable than it is today of the same
amount.
D. The present value of future cash flows is lower than their future value.
7. Which type of risk can be eliminated through diversification?
A. Systematic risk C. Market risk
B. Unsystematic risk D. Beta risk
8. Which one of the following is a type of equity security that has a fixed dividend and a
priority status over other equity security?
A. Callable bond C. Common stock
B. preferred stock D. Debenture
9. Stock A's beta is 1.5 and stock B's beta is 0.5. Which of the following statements must be
true about these securities? (Assume market equilibrium.)
A. Stock B must be a more desirable addition to a portfolio than A.
B. Stock A must be a more desirable addition to a portfolio than B.
C. The expected return on Stock A should be greater than that on B.
D. The expected return on Stock B should be greater than that on A.
10. Beta measures the:
A. Expected rate of return of an investment
B. Risk of an investment relative to the market
C. Historical rate of return of an investment
D. Correlation between two investments
11. Factors affecting the risk and return of an investment include:
A. Inflation rate C. Political stability
B. Market demand D. All of the above
12. Which measure is used to quantify the risk of historical rates of return?
A. Standard deviation C. Coefficient of variation
B. Mean D. Beta
13. The coefficient of variation is a measure of
A. Historical rates of return C. Risk relative to the expected return
B. Expected rates of return D. Risk relative to the market
14. XYZ Company's stock has a 25% chance of producing a 30% return, 50% chance of
producing a 12% return and a 25% chance of producing a -18% return What is the firms
expected rate of return?
A. A 7.72% C. 8.55%
B. 8.12% D. 9%
15. DEF Company is considering a capital budgeting project that has an expected return
of25% and a standard deviation of 30% what is the project’s coefficient of variation?
A. 1.20 B. 1.26 C. 1.32 D. 1.39

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 16. XYZ Corporation is expected to pay an annual dividend of $0.80 a share next year. The
market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's
cost of equity?
A. A.7.23 % C. 8.24 %
B. 7.91 % D. 8.57 %
17. Which of the following is NOT a capital component when calculating the weighted
average cost of capital (WACC) for use in capital budgeting?
A. Long-term debt. C. Retained earnings
B. Accounts payable. D. Common stock
18. A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an
$8.00 annual dividend. If the company were to sell a new preferred issue, it would incur
a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock?
A. 7.81% B. 8.22% C. 8.65% D.9. 10%
19. Assume that you are á consultant to ABC Company and you have been provided with the
following data: D1 = $0.67, Po $27.50; and g=8% (constant). What is the cost of
common from retained earnings based on the DCF approach?
A. 9.42% B. 9.91 C. 10.44% D. 10.96
20. . LMN Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market
risk premium is 5.50%. What is the firm's required rate of return?
A. 11.36% B. 1l.65% C.11.95% D. 12.25%
Part IV: work out questions
Instruction: Show all the necessary steps.
1. ABC Company is considering investing Birr 100,000 in short term investments. Let’s call
these investments, Investment A &B. Based on some research, we believe that the rate of
return to be earned on investments A&B is directly related to how the Ethiopian economy
performs in the near future. The table below shows possible rates of return on the short-term
investment the firm planned to make and probabilities for the possible performance of the
national economy. Invest 60% of your money in investment A and 40% on B
State Probability Rate of return on Investment A Rate of return Investment B
God 0.3 30 5
Average 0.5 12 25
Bad 0.1 -10 -5

A. What is the expected return and standard deviation for each investment?(5 point)
2. You were hired as a consultant to GEF Company, whose target capital structure is 40%
debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of
preferred is 7.50%, and the cost of common using retained earnings is 12.75%. The firm will
not be issuing any new stock.
A. What is its WACC (2 point)?
3. Ato Kibret wants to acquire a new equipment of birr 10,000. How much must be deposited
today in an account paying 8% compounded monthly in order to have birr 10,000 in the
account 5 years from now (3 point)??

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Name_______________________________ID.NO___________Section_______Add_____
Part -I: Answer Sheet for True or False questions
1. 2. 3. 4. 5.
6 7 8 9 10
Part -II: Answer Sheet for Multiple choice questions
1. 2. 3. 4. 5.
6. 7. 8. 9. 10.
11. 12. 13. 14. 15.
16. 17. 18. 19 20

Part -III Work out questions