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B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2021 Mar 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

2021 Mar 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 2021 Mar examination.

The questions below are the paper as Karnataka State Law University set it at the 2021 Mar examination, in the order it was set.

MarksPage

The Paper as Set

The questions in this volume are the questions asked at the 2021 Mar 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 · 13 questions answered

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

Q1From the following capital structure of a company, calculate the overall cost of capital, using[16]

Answer

The figures given in the question

(a) Book value of weights and

(b) Market value of weights.

Source of capital	Book Value (Rs.)	Market Value (Rs.)
Equity shares	2,00,000	3,00,000
16% Debentures	60,000	61,200
10% short-term loans	40,000	40,000

The cost of equity share capital is 20%, Tax rate for such company is 50%.

For full marks, cover: the after-tax cost of each source (equity as given; debentures and the short-term loan after 50 per cent tax); (a) the WACC with book value weights; (b) the WACC with market value weights; a check by the weights method; the effect of costing the debentures at their market price; and a comment on why the two results differ.

Step 1: specific costs after tax

Interest is allowed as an expense for tax, so the cost of borrowing after tax is the interest rate × (1 - tax rate). Equity dividends get no tax relief, so the cost of equity stays at 20 per cent.

Source	Rate before tax (%)	Working	Cost after tax (%)
Equity shares	20	Given	20
16% debentures	16	16 × (1 - 0.50)	8
10% short-term loans	10	10 × (1 - 0.50)	5

The short-term loans are included because the question lists them as part of the capital structure.

(a) Overall cost of capital with book value weights

Source	Book value (Rs)	Weight (%)	Cost after tax (%)	Total cost (Rs)
Equity shares	2,00,000	66.67	20	40,000
16% debentures	60,000	20.00	8	4,800
10% short-term loans	40,000	13.33	5	2,000
Total	3,00,000	100.00		46,800

For example, 60,000 × 8/100 = 4,800 and 60,000 / 3,00,000 × 100 = 20 per cent.

WACC = 46,800 / 3,00,000 × 100 = 15.6 per cent.

Check by weights. 0.6667 × 20 + 0.20 × 8 + 0.1333 × 5 gives about 15.6 per cent.

(b) Overall cost of capital with market value weights

Source	Market value (Rs)	Weight (%)	Cost after tax (%)	Total cost (Rs)
Equity shares	3,00,000	74.78	20	60,000
16% debentures	61,200	15.25	8	4,896
10% short-term loans	40,000	9.97	5	2,000
Total	4,01,200	100.00		66,896

For example, 61,200 × 8/100 = 4,896 and 3,00,000 / 4,01,200 × 100 comes to 74.78 per cent.

WACC = 66,896 / 4,01,200 × 100, which comes to 16.67 per cent.

Check by weights. 0.7478 × 20 + 0.1525 × 8 + 0.0997 × 5 gives about 16.67 per cent.

Note: debentures costed at their market price

Some books cost the debentures at their market price instead of their face value. The interest of 60,000 × 16/100 = 9,600 is then measured against the market value of Rs 61,200. After tax this is 9,600 × 0.5 / 61,200 × 100, about 7.84 per cent. The market value WACC becomes about 16.65 per cent, almost the same. The answer above keeps one cost for each source and changes only the weights, which is the usual method.

Comment

The WACC is higher on market values (16.67 per cent) than on book values (15.6 per cent). The market values the equity at Rs 3,00,000, half as much again as its book value of Rs 2,00,000. Equity is the costliest source at 20 per cent, so its weight rises from 66.67 to 74.78 per cent and pulls the average up. The debentures and the loan, which cost only 8 and 5 per cent after tax, carry less weight at market value. Market value weights show what investors think the capital is worth today, so they are better for judging new investments.

Conclusion. After tax, equity costs 20 per cent, the debentures 8 per cent and the short-term loans 5 per cent. (a) With book value weights the overall cost of capital is 15.6 per cent (Rs 46,800 on Rs 3,00,000). (b) With market value weights it is about 16.67 per cent (Rs 66,896 on Rs 4,01,200).

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