KSLU Solved Question Papers
Financial Management
Previous Year Question Paper with Solution
B.B.A. LL.B. (Five Years) · Sem 4
2021 Oct Examination
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Mumbai
B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2021 Oct 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 2021 Oct examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2021 Oct examination, in the order it was set.
MarksPage
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2021 Oct 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 80 · 20 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.
Q1
(a)From the following capital structure of a company, calculate the overall cost of capital using[10]
Answer
The figures given in the question
(a) Book value weights.
(b) Market value weights.
| Source | Book value | Market value |
|---|---|---|
| Equity share capital (₹ 10 per share) | 45,000 | 90,000 |
| Retained earnings | 15,000 | - |
| Preference share capital | 10,000 | 10,000 |
| Debentures | 30,000 | 30,000 |
The after tax cost of different sources of finance are as follows :
Share capital : 14%, Retained earnings : 13%, Preference share capital : 10%, Debentures : 5%.
For full marks, cover: (a) the WACC with book value weights by the total cost method; (b) the treatment of retained earnings at market value, the split of the equity's market value between share capital and retained earnings, and the WACC with market value weights; the result on the other treatment; and a comment on the difference.
(a) Overall cost of capital with book value weights
| Source | Book value (Rs) | Cost after tax (%) | Total cost (Rs) |
|---|---|---|---|
| Equity share capital | 45,000 | 14 | 6,300 |
| Retained earnings | 15,000 | 13 | 1,950 |
| Preference share capital | 10,000 | 10 | 1,000 |
| Debentures | 30,000 | 5 | 1,500 |
| Total | 1,00,000 | 10,750 |
For example, 45,000 × 14/100 = 6,300.
WACC = 10,750 / 1,00,000 × 100 = 10.75 per cent.
The weights are 45, 15, 10 and 30 per cent. Check: 0.45 × 14 + 0.15 × 13 + 0.10 × 10 + 0.30 × 5 = 10.75 per cent.
(b) Overall cost of capital with market value weights
Working note: retained earnings at market value. Retained earnings are not traded, so they have no market value of their own. They belong to the equity shareholders, and the market value of the equity, Rs 90,000, covers both. It is split in the ratio of their book values, 45,000 : 15,000, that is 3 : 1.
- Equity share capital = 90,000 × 3/4 = 67,500.
- Retained earnings = 90,000 × 1/4 = 22,500.
| Source | Market value (Rs) | Cost after tax (%) | Total cost (Rs) |
|---|---|---|---|
| Equity share capital | 67,500 | 14 | 9,450 |
| Retained earnings | 22,500 | 13 | 2,925 |
| Preference share capital | 10,000 | 10 | 1,000 |
| Debentures | 30,000 | 5 | 1,500 |
| Total | 1,30,000 | 14,875 |
WACC = 14,875 / 1,30,000 × 100, which comes to 11.44 per cent.
The other treatment. If the whole Rs 90,000 is costed at the equity rate of 14 per cent, the total cost is 12,600 + 1,000 + 1,500 = 15,100. The WACC is then 15,100 / 1,30,000 × 100, about 11.62 per cent. The split is preferred, because retained earnings have their own cost of 13 per cent.
Comment
The WACC is higher on market values (11.44 per cent) than on book values (10.75 per cent). The market values the equity at Rs 90,000, against Rs 60,000 of share capital and retained earnings in the books. Equity is the costliest source, so its larger weight raises the overall cost. Debentures, the cheapest source at 5 per cent, carry less weight at market value. Market value weights reflect what investors think the capital is worth today, so they are better for decisions.
Conclusion. (a) With book value weights the overall cost of capital is 10.75 per cent (Rs 10,750 on Rs 1,00,000). (b) With market value weights it is about 11.44 per cent (Rs 14,875 on Rs 1,30,000). Here the equity's market value is split 3 : 1 between share capital and retained earnings.
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