KSLU Solved Question Papers
Financial Management
Previous Year Question Paper with Solution
B.B.A. LL.B. (Five Years) · Sem 4
2013 Jun (70 marks) Examination
munotes.in
Mumbai
B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2013 Jun (70 marks) Question Paper with Solutions
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.
Passages from this volume may be quoted, in print, online or by an AI system, with credit: name munotes.in and link to this volume's page. The volume may not be reproduced as a whole. Full terms at munotes.in/content-license.
munotes.in is an independent study resource for students of Karnataka State Law University. It is not affiliated with Karnataka State Law University, and is not endorsed by it.
The University does not publish an official answer key for this paper. The answers in this volume are model answers, written to show how a full-mark answer is built. They are a study aid, not an authority on what an examiner marked.
The question paper reproduced here is the paper as set by Karnataka State Law University at the 2013 Jun (70 marks) examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2013 Jun (70 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 (70 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 2½ hours · Total marks 70 · 20 questions answered
Instructions printed on the paper
- N.B. (1) Answer all 5 questions. (2) One essay type and one short note questions from each Unit to be attempted, referred as part (a) and (b). (3) Figures to the right indicate marks. (4) Use of 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)Explain the advantages and limitations of cost of capital.[9]
Answer
For full marks, cover: a short meaning of cost of capital with a WACC figure; its advantages, decision by decision, with the way it is used in each; its limitations, with the reason for each; a worked example showing how an error in the estimate can change a decision; and a balanced conclusion.
Meaning
The cost of capital is the rate of return a company must earn on the funds it employs to satisfy all its suppliers of capital. At that rate the market value of its shares is maintained. It is normally measured as the weighted average cost of capital (WACC). Suppose half the funds come from equity costing 16 per cent and half from debt costing 8 per cent after tax. Then WACC = 0.5 × 16 + 0.5 × 8 = 12 per cent.
Advantages of the concept
| Decision | How the cost of capital is used |
|---|---|
| Investment (capital budgeting) | It is the discount rate for NPV and the cut-off rate for IRR |
| Financing mix | It shows which mix of debt and equity gives the lowest overall cost |
| Choice of source | It allows debentures, preference shares, loans and new equity to be compared on one scale |
| Dividend and retention | It shows whether retained profits can earn more than shareholders could earn elsewhere |
| Performance review | Actual returns are judged against it |
| Other decisions | Lease or buy, credit terms, stock levels and business valuation all use it |
1. A hurdle for investment. A project is worth undertaking only if it is expected to earn more than the cost of the funds it uses. At a cost of capital of 12 per cent, a project expected to earn 15 per cent adds value. One earning 10 per cent destroys it.
2. Designing the capital structure. The finance manager compares the specific costs of debt and equity and sees how they change as debt rises. This guides the firm towards the mix with the lowest overall cost.
3. Choosing the source of new funds. When money must be raised, the source with the lowest cost after tax, within acceptable risk, can be identified.
4. Retention or payout. Retained earnings are worth keeping only where the company can earn at least the shareholders' required return on them.
5. Judging management. A return on capital employed above the cost of capital shows that management has added to the owners' wealth.
6. Many other uses. Lease-or-buy choices, the cost of carrying stock and debtors, and the valuation of a business for a merger all need a rate. The cost of capital supplies it.
Limitations of the concept
1. The cost of equity is an estimate. Shareholders are promised nothing, so their required return must be inferred. The dividend growth model, the earnings yield and CAPM often give quite different figures.
2. The weights are a choice. Book values, market values and target proportions give different averages, and market values change daily.
3. Past figures and future needs. Decisions need the cost of new money, but only past costs can be measured.
4. One rate for all projects. A single average suits only projects of ordinary risk; it penalises safe projects and favours risky ones.
5. Changing conditions. Interest rates, tax rates and share prices change, so the figure soon goes out of date.
6. Theory is divided. Writers disagree on whether the mix of debt and equity affects the overall cost at all.
Why the limitations matter: an example
A project costs Rs 1,00,000 and returns Rs 30,000 a year for five years.
| Estimated cost of capital | 5-year annuity factor | PV of inflows (Rs) | NPV (Rs) | Decision |
|---|---|---|---|---|
| 14% | 3.432 | 1,02,960 | 2,960 | Accept |
| 16% | 3.274 | 98,220 | (1,780) | Reject |
PV = 30,000 × annuity factor; at 14 per cent, 30,000 × 3.432 = 1,02,960. A difference of only 2 percentage points in the estimated cost of capital turns the decision from accept to reject. Different methods of measuring the cost of equity can easily differ by that much.
Conclusion. The cost of capital is the yardstick for investment, financing, dividend and performance decisions, and no sound financial decision can be taken without it. Its limitations lie in measurement: the cost of equity, the weights, and future rates are all estimates, and one rate cannot fit every risk. It should therefore be estimated carefully and used with judgement, especially for projects close to the cut-off.
The rest of the answers
The first answer is free. The rest come with the KSLU B.B.A. LL.B. Semester 4 solved papers.
You have read the question paper and its first answer in full. Buy the solved papers once and you can read every answer of every solved paper in this semester.
Solved papers: ₹499 Already bought it? Sign in
The question paper itself stays free, and so does the syllabus.
Found an error in this volume? Report it and we will check it against the paper.