KSLU Solved Question Papers
Financial Management
Previous Year Question Paper with Solution
B.B.A. LL.B. (Five Years) · Sem 4
2013 Jun (100 marks) Examination
munotes.in
Mumbai
B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2013 Jun (100 marks) 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 2013 Jun (100 marks) examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2013 Jun (100 marks) examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2013 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, which is referred as Part (a) and Part (b). (3) Figures to the right indicate marks. (4) Use simple calculators only.
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 Ganga Company is planning to expand its business and accordingly the company desires to increase assets by 50% by the end of the year 2012. The existing capital structure representing the optimum capital structure of the company as given below :[15]
Answer
The figures given in the question
| Particulars | Rs. |
|---|---|
| 8% Debentures (Par value Rs. 1,000 per debenture) | 4,00,000 |
| 9% Preference shares (Par value of Rs. 100 per share) | 1,00,000 |
| Equity shares (Par value of Rs. 100 per share) | 5,00,000 |
| Total | 10,00,000 |
New debentures can be sold at par at 10% interest rate. Preference shares will have a 12% dividend rate and can be sold at par. Equity shares can be sold to net Rs. 90 per share. The shareholder's required rate of return is 8% which is expected to grow at 4%. Retained earnings for the year are estimated to be Rs. 50,000.
You are required to compute the cost of individual capital components and the overall cost of capital.
For full marks, cover: the amount of new finance needed for a 50 per cent growth in assets; its split in the optimum (existing) proportions; the split of the equity part between retained earnings and a fresh issue; the specific cost of each component, with the reading of "8 per cent growing at 4 per cent"; the weighted (marginal) cost of the new capital, with a check; and a comment.
Step 1: the new finance and its mix
The present capital of Rs 10,00,000 finances the present assets. A 50 per cent rise in assets therefore needs 10,00,000 × 50 / 100 = Rs 5,00,000 of new finance. The present structure is stated to be the optimum, so the new money is raised in the same proportions.
| Component | Present (Rs) | Share | New finance (Rs) |
|---|---|---|---|
| 8% Debentures | 4,00,000 | 40% | 2,00,000 |
| 9% Preference shares | 1,00,000 | 10% | 50,000 |
| Equity | 5,00,000 | 50% | 2,50,000 |
| Total | 10,00,000 | 100% | 5,00,000 |
The equity part of Rs 2,50,000 is met first from the year's retained earnings of Rs 50,000. The balance, 2,50,000 - 50,000 = Rs 2,00,000, is raised by issuing new equity shares at a net Rs 90 each, about 2,222 shares.
No tax rate is given, so the costs are taken without tax adjustment.
Step 2: specific costs of the new components
New debentures. Issued at par at 10 per cent: Kd = 10 per cent.
New preference shares. Issued at par with a 12 per cent dividend: Kp = 12 per cent.
Equity. The paper speaks of "a required rate of return of 8 per cent expected to grow at 4 per cent". This is read as a dividend of Rs 8 a share, growing at 4 per cent a year. Rs 8 is 8 per cent of the Rs 100 par value. By the dividend growth model, K = D / P + g.
- Retained earnings: no issue cost, so the dividend is related to the full Rs 100. Kr = 8 / 100 + 0.04 = 0.12, that is 12 per cent.
- New equity shares: the company nets only Rs 90 a share. Ke = 8 / 90 + 0.04, which comes to about 0.1289, that is 12.89 per cent.
Step 3: overall (marginal) cost of capital
| Component | Amount (Rs) | Weight | Cost (%) | Annual cost (Rs) |
|---|---|---|---|---|
| New 10% debentures | 2,00,000 | 0.40 | 10.00 | 20,000 |
| New 12% preference shares | 50,000 | 0.10 | 12.00 | 6,000 |
| Retained earnings | 50,000 | 0.10 | 12.00 | 6,000 |
| New equity shares | 2,00,000 | 0.40 | 12.89 | 25,778 |
| Total | 5,00,000 | 1.00 | 57,778 |
The cost of new equity is 2,00,000 × 12.89 per cent. In parts, 2,00,000 × 8 / 90 is about 17,778 and 2,00,000 × 0.04 is 8,000, about 25,778 in all.
Overall cost of capital = 57,778 / 5,00,000 × 100, which comes to about 11.56 per cent.
Check by weights. 0.40 × 10 = 4.0; 0.10 × 12 = 1.2; 0.10 × 12 = 1.2; 0.40 × 12.89, about 5.16. Then 4.0 + 1.2 + 1.2 + 5.16 = 11.56 per cent.
Comment
The figure is the marginal cost of capital, the cost of the extra Rs 5,00,000 the expansion requires. Every new source costs more than the present one. Debentures rise from 8 to 10 per cent, and preference shares from 9 to 12 per cent. The equity issued afresh costs more than retained earnings because Rs 10 of every share goes in issue expenses. The expansion is worthwhile only if the additional assets can earn at least about 11.56 per cent. If a tax rate were known, the debenture cost would be 10 × (1 - tax rate), and the overall cost would fall.
Conclusion. The Rs 5,00,000 of new capital is raised as Rs 2,00,000 of 10 per cent debentures and Rs 50,000 of 12 per cent preference shares. The other Rs 2,50,000 is equity. Of the equity, Rs 50,000 is retained earnings and Rs 2,00,000 new shares. The component costs are 10, 12, 12 and about 12.89 per cent, and the overall cost of the new capital is about 11.56 per cent.
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