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B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2012 Jun (100 marks) Question Paper with Solutions

KSLU Solved Question Papers

Financial Management

Previous Year Question Paper with Solution

B.B.A. LL.B. (Five Years) · Sem 4

2012 Jun (100 marks) Examination

munotes.in

Mumbai

First published on munotes.in on 21 October 2026.

Published by munotes.in, Mumbai.

Model answers written and edited by the munotes.in editorial desk.

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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2012 Jun (100 marks) examination.

The questions below are the paper as Karnataka State Law University set it at the 2012 Jun (100 marks) examination, in the order it was set.

MarksPage

The Paper as Set

The questions in this volume are the questions asked at the 2012 Jun (100 marks) 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. (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.

Read the original question paper

Q1

Unit I

(a)Following are the details regarding the capital structure of a company.[15]

Answer

The figures given in the question

Sources of Capital	Book Value	Market Value	Specific Cost
Debentures	80,000	76,000	10%
Preference shares	20,000	22,000	15%
Equity shares	1,20,000	1,80,000	30%
Retained Earnings	40,000	60,000	15%

You are required to determine the weighted average cost of capital using

a) Book value as weights

b) Mark value as weights.

For full marks, cover: the meaning of WACC and the two kinds of weight; (a) the WACC using book value weights, worked by percentage weights and checked by total cost; (b) the same using market value weights; a comparison of the two; the merits and limits of each kind of weight; a note on how much the result depends on the cost of retained earnings; and a conclusion.

Meaning

The weighted average cost of capital (WACC) is the average of the specific costs of a company's sources of funds. Each cost is weighted by the source's share in the total. The weights may be book values (as in the balance sheet) or market values (what the securities are worth today). The specific costs given are treated as after-tax costs; "Mark value" in the paper is read as market value.

(a) Book value as weights

Source	Book value (Rs)	Weight (%)	Specific cost (%)	Weight × cost (%)
Debentures	80,000	30.77	10	3.077
Preference shares	20,000	7.69	15	1.154
Equity shares	1,20,000	46.15	30	13.846
Retained earnings	40,000	15.39	15	2.308
Total	2,60,000	100.00		20.385

Each weight is the source as a percentage of Rs 2,60,000; debentures are 80,000 / 2,60,000 × 100, about 30.77. Retained earnings are 15.3846 per cent, shown as 15.39 so that the column adds to 100. Each product is worked on the exact weight.

Check by total cost. 80,000 × 10% + 20,000 × 15% + 1,20,000 × 30% + 40,000 × 15% gives 8,000 + 3,000 + 36,000 + 6,000 = 53,000. Then 53,000 / 2,60,000 × 100 comes to about 20.38 per cent.

WACC on book value weights = about 20.38 per cent.

(b) Market value as weights

Source	Market value (Rs)	Weight (%)	Specific cost (%)	Weight × cost (%)
Debentures	76,000	22.49	10	2.249
Preference shares	22,000	6.51	15	0.976
Equity shares	1,80,000	53.25	30	15.976
Retained earnings	60,000	17.75	15	2.663
Total	3,38,000	100.00		21.864

Check by total cost. 7,600 + 3,300 + 54,000 + 9,000 = 73,900, and 73,900 / 3,38,000 × 100 comes to about 21.86 per cent.

WACC on market value weights = about 21.86 per cent.

Comparison

The market value WACC is higher by about 1.48 percentage points. The specific costs are the same on both bases; only the weights change. Equity, at 30 per cent the dearest source, rises from about 46 to about 53 per cent of the total. The market values it at Rs 1,80,000 against Rs 1,20,000 in the books. The cheapest source, debentures at 10 per cent, falls from about 31 to about 22 per cent of the total.

Merits and limits of each weight

Book value weights	Market value weights
Easy to find from the balance sheet	Show what investors think the securities are worth now
Stable from year to year	Change with every movement in the share market
Reflect past issue prices, which may be out of date	Match the prices at which new funds must be raised
Used in many companies' policies and loan terms	Preferred in theory for investment decisions

How much the cost of retained earnings matters

Retained earnings are shown at 15 per cent, half the cost of equity. Their true cost is the shareholders' opportunity cost, often taken as equal to the cost of equity. At 30 per cent the book value WACC would be 59,000 / 2,60,000, about 22.69 per cent. The market value WACC would be 82,900 / 3,38,000, about 24.53 per cent. The answer uses the cost as printed, but this shows how sensitive the result is to that one estimate.

Conclusion. The weighted average cost of capital is about 20.38 per cent with book value weights (Rs 53,000 on Rs 2,60,000). With market value weights it is about 21.86 per cent (Rs 73,900 on Rs 3,38,000). The market figure is higher because the market values equity, the costliest source, well above its book amount. It is the better guide for new investment.

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