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Fm iv
1. FINANCIAL MANAGEMENT I
Individual Assignment-4
Instruction-Select and answer 10 question form Multiple choice part (10%) and 2
Question from Workout part (10%). Copy and Paste from other students will make
your result zero. Answer key should be submitted using Google class only.
Deadline for submission-August 12, 2020.
Part I: Multiple Choices Questions
1. Which of the following is true about systematic risk?
A. It is avoidable risk
B. It is diversifiable risk
C. It is company specific risk
D. All of the above
2. Which of the following statement is true?
A. The higher the expected risk, the higher is the expected return.
B. Risk is possibility that actual future returns will deviate from expected returns
C. Total risk is the sum of systematic and unsystematic risk and is measured by standard
deviation.
D. All of the above
3. Suppose you have two securities Security X and Security Y. The expected return of the
securities is 20% and 12% respectively. The standard deviation of Security X is 8% and the
standard deviation of Security Y is 6%. Which of the following is statement is true if you hold
only one security?
A. Security X is a better option for investment.
B. Security Y is a better option for investment.
C. Security Y has less risky than security Y.
D. None of the above
4. Which of the following is correct about leverage?
A. Combined Leverage = Operating Leverage + Financial Leverage
B. Combined Leverage = Operating Leverage - Financial Leverage
C. Combined Leverage = Operating Leverage × Financial Leverage
D. Combined Leverage = Operating Leverage ÷ Financial Leverage
5. Firm ABC's percentage change in sales is 20%. If firm's degree of operating leverage is 5, what
is the percentage change in EBIT?
A. 20%
B. 100%
C. 4%
D. 80%
6. Financial Leverage measures relationship between:
A. Sales and profit before tax (EIBT).
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Assignment-4(FM-I)
B. Sales and earnings per share (EPS).
C. Earning before interest & tax (EBIT) and profit before tax (PBT).
D. Earning before interest & tax (EBIT) and earnings per share (EPS).
7. Which of the following capital budgeting evaluation method is NOT a discounted cash flow
technique?
A. Accounts Rate of Return
B. Net Present Value
C. Payback period
D. All of the above.
8. If a firm has a degree of operating leverage (DOL) of 1.8, it means:
A. If sales increase by 1.8%, the EBIT will increase by 1%.
B. If sales increase by 1%, EBIT will increase by 1.8%.
C. If EBIT increase by 1.8%, the EPS will increase by 1 %.
D. If sales rise by 1%, EBIT will fall by 1.8 %.
9. Which of the following capital budgeting evaluation method considers all cash inflows?
A. Accounts Rate of Return
B. Net Present Value
C. Payback period
D. Discounted payback period.
10. Which of the following is disadvantage of the payback period method?
A. It does consider all cash inflows.
B. It is easy to compute and interpret.
C. It does not consider the time value of money.
D. It deals with accounting profits.
11. Which of the following statement is correct?
A. If two projects are mutually exclusive & have positive NPV, both can be accepted.
B. If two projects are independent & have positive NPV, both can be accepted.
C. A firm should accept a project if the estimated NPV exceeds the project’s cost.
D. A firm should accept a project if the estimated NPV is negative.
12. Profitability index (PI) of 1 implies that an investment’s:
A. Total Present value of cash inflows & the initial investment are equal.
B. NPV of the project equals to zero.
C. IRR equals the firm’s required rate of return.
D. A and B are correct
13. 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.
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Assignment-4(FM-I)
14. If the net present value of a project is zero based on a discount rate of 20 %, then the internal
rate of return is:
A. Equal to 20 %.
B. Less than 20 %.
C.Greater than 20%.
D. cannot be determined
15. Hop Company has $15,000 in cash, $5,000 in marketable securities, $20,000 in accounts
receivable, $20,000 in inventories, and $30,000 in current liabilities. The company's current
assets consist of cash, marketable securities, accounts receivable, and inventory. The
company's acid-test ratio is:
A. 1.50
B. 2.00
C. 1.90
D. 1.33
16. Last year JJ Company had a net income of $500,000, income tax expense of $150,000, and
interest expense of $100,000. The company's times interest earned was closest to:
A. 5.00
B. 6.00
C. 6.50
D. 7.50
E. None
17. Brass Company's debt-to-equity ratio is 0.8. Total liabilities total $300,000. Brass Company's
total assets must be:
A. $675,000
B. $375,000
C. $450,000
D. $550,000
18. The investor is considering investing in a Br. 500,000, 10%, 10 years term bonds of ABC
Corporation. If the market interest rate is 10%, what is the value of the bond if interest is paid
annually?
A. Br. 583,500
B. Br. 450,000
C. Br. 500,000
D. None
19. The investor is considering investing in a Br. 500,000, 14%, 5 years term bonds of XYZ
Corporation. The market interest rate is 12%. What is the value of the bond if interest is paid
semiannually?
A. Br.500,000
B. Br.536,800
C. Br.530,000
D. None
Part II: workout questions (15pts)
1. The following information relates to a three security portfolio. What is the expected return
for the portfolio? ( 5 points)
Security Amount
invested
State of
economy
Probability of
Occurrence
Possible Return
A Birr 40,000 Boom 0.4 50%
B Birr 30,000 Normal 0.3 30%
C Birr 30,000 Recession 0.3 20%
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Assignment-4(FM-I)
2. A project requires an initial investment of Br. 500,000. It generates the following net cash
flows for six years:
Year 1 2 3 4 5 6
Net cash inflows at year
end
200,000 250,000 300,000 350,000 200,000 100,000
If the required rate of return is 12%.
Required: Compute
a. Payback period
b. NPV & decide whether the project is accepted or rejected
c. Profitability index & decide whether the project is accepted or rejected
3. XYZ Corporation needs a fund to invest in projects after evaluating. XYZ Company decides
to issue bond, preferred stock and common stock and use part of retained earnings. The
company estimates that it can issue bond at a before-tax cost of 15%, and its tax rate is 40%.
The company also can issue preferred stock at $105 per share with flotation cost of $ 5 per
share, and pays a constant dividend of $10 per share per year. The company common stock
currently sells at $165 per share and pays a flotation cost $ 15 per share. The current dividend
is $50 per share, and is expected to grow at a constant rate of 5 % per year. The company’s
target capital structure consists of 30 % debt; 10% preferred stock, 20% retained earnings and
40 % common stock.
Required; Compute:
a. What is the after tax cost Bond ?
b. What is the cost preferred stock?
c. What is the cost of common stock?
d. What is the cost of retained
e. What is the WACC for XYZ Corporation?
f. If the alternative projects and their IRR is as follows:
Which project would XYZ Corporation accept if the projects are independent
considering the above weighted average cost of capital?
Project IRR
A 20%
B 35%