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Financial Management
Previous Year Question Paper with Solution
B.B.A. LL.B. (Five Years) · Sem 4
2011 Jun Examination
munotes.in
Mumbai
B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2011 Jun Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2011 Jun examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2011 Jun examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2011 Jun examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 20 questions answered
Instructions printed on the paper
- N.B. (1) Answer all 5 questions. (2) One essay type and one short note question or problem from each Unit have to be attempted, which is referred as Part (a) and (b) in all the Units. (3) Figures to the right indicate marks.
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1
Unit I
(a)The capital structure of Sun Ltd. is as follows :[15]
Answer
The figures given in the question
| Equity share capital | 10,00,000 |
| 6% Preference share capital | 5,00,000 |
| 8% Debentures | 15,00,000 |
The company has made a profit of ₹ 25,000. The company is under 50% tax bracket. It has 1000 equity shares of ₹ 100 each and market price of which is ₹ 145 each and the growth in dividend is 8%.
a) Calculate the weighted average cost of capital.
b) Also calculate the new weighted average cost of capital if the company raises an additional ₹ 10,00,000 debt by issuing 10% debentures. This would result in an increase in the expected dividend by ₹ 5 per share, growth rate in dividend has increased to 9% and the market price will come upto ₹ 150 per share.
For full marks, cover: the reading of the profit of Rs 25,000 as a dividend of Rs 25 on each of the 1,000 shares; the cost of equity by the dividend growth model; the cost of preference shares; the cost of debentures after tax; (a) the WACC on the present structure; (b) the new costs after the 10 per cent debentures and the new WACC; a comparison; and a note on the printed figures.
How the data are read
The company has 1,000 equity shares and made a profit of Rs 25,000, that is, Rs 25 a share. Part (b) speaks of an increase in the expected dividend of Rs 5 a share. So the whole profit is taken as paid out, and the expected dividend now is Rs 25 a share.
The weights are the book values printed in the capital structure. (The paper's 1,000 shares of Rs 100 would make only Rs 1,00,000; the printed equity capital of Rs 10,00,000 is used as the weight.)
Specific costs at present
Cost of equity (Ke). By the dividend growth model, Ke = D1 / P0 + g.
Ke = 25 / 145 + 0.08. Here 25 / 145 is about 0.1724, so Ke is about 0.2524, or 25.24 per cent.
Cost of preference shares (Kp). The dividend is 6 per cent of the face value and no market price is given, so Kp = 6 per cent.
Cost of debentures (Kd). Interest is allowed for tax at 50 per cent, so Kd = 8 × (1 - 0.50) = 4 per cent.
(a) WACC on the present structure
| Source | Book value (Rs) | Weight | Cost (%) | Total cost (Rs) |
|---|---|---|---|---|
| Equity share capital | 10,00,000 | 0.3333 | 25.24 | 2,52,414 |
| 6% Preference shares | 5,00,000 | 0.1667 | 6.00 | 30,000 |
| 8% Debentures | 15,00,000 | 0.5000 | 4.00 | 60,000 |
| Total | 30,00,000 | 1.0000 | 3,42,414 |
Total cost of equity = 10,00,000 × 0.252414, which comes to 2,52,414.
WACC = 3,42,414 / 30,00,000 × 100, which comes to about 11.41 per cent.
Check by weights. The weights are one third, one sixth and one half. 25.24 / 3 is about 8.41, 6 / 6 is 1 and 4 / 2 is 2, and 8.41 + 1 + 2 = 11.41 per cent.
(b) WACC after raising Rs 10,00,000 by 10 per cent debentures
New cost of equity. The expected dividend rises by Rs 5 to Rs 30, the growth rate to 9 per cent and the price to Rs 150.
Ke = 30 / 150 + 0.09 = 0.20 + 0.09 = 0.29, or 29 per cent.
The higher debt makes the equity riskier, so shareholders now expect more.
Cost of the new debentures. Kd = 10 × (1 - 0.50) = 5 per cent.
The old preference shares and debentures keep their costs of 6 and 4 per cent.
| Source | Book value (Rs) | Weight | Cost (%) | Total cost (Rs) |
|---|---|---|---|---|
| Equity share capital | 10,00,000 | 0.250 | 29 | 2,90,000 |
| 6% Preference shares | 5,00,000 | 0.125 | 6 | 30,000 |
| 8% Debentures | 15,00,000 | 0.375 | 4 | 60,000 |
| 10% Debentures (new) | 10,00,000 | 0.250 | 5 | 50,000 |
| Total | 40,00,000 | 1.000 | 4,30,000 |
New WACC = 4,30,000 / 40,00,000 × 100 = 10.75 per cent.
Check by weights. 0.25 × 29 + 0.125 × 6 + 0.375 × 4 + 0.25 × 5 = 7.25 + 0.75 + 1.50 + 1.25 = 10.75 per cent.
Comparison
| Particulars | Before | After |
|---|---|---|
| Cost of equity | 25.24% | 29% |
| Share of debt in total capital | 50% | 62.5% |
| WACC | 11.41% | 10.75% |
The cost of equity rises from 25.24 to 29 per cent, because the shareholders bear more financial risk. But the new funds come from debt costing only 5 per cent after tax, and debt now forms 62.5 per cent of the capital. The cheaper debt outweighs the dearer equity, so the overall cost falls by about 0.66 percentage point. On these figures the extra debt lowers the WACC. The company must still watch its interest burden, as debt is now well over half its capital.
On the other reading. If the Rs 25 is taken as the dividend just paid (D0), then D1 = 25 × 1.08 = 27. Ke is then 27 / 145 + 0.08, about 26.62 per cent, and the WACC about 11.87 per cent. In part (b), D1 = 30 × 1.09 = 32.70, Ke 30.8 per cent and the WACC 11.20 per cent. The conclusion, that the WACC falls, is the same.
Conclusion. The specific costs are equity 25.24 per cent, preference shares 6 per cent and debentures 4 per cent after tax. (a) The present WACC is about 11.41 per cent. (b) After the Rs 10,00,000 of 10 per cent debentures, equity costs 29 per cent and the new debt 5 per cent after tax. The WACC falls to 10.75 per cent.
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