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B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2022 Apr 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

2022 Apr 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.

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.

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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 2022 Apr examination.

The questions below are the paper as Karnataka State Law University set it at the 2022 Apr examination, in the order it was set.

MarksPage

The Paper as Set

The questions in this volume are the questions asked at the 2022 Apr 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 · 18 questions answered

Instructions printed on the paper

N.B. (1) Answer all five Units. (2) One essay type question and short note/problems is compulsory from each Unit. (3) Figures to the right indicate marks. (4) Answer should be written in English completely.

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)The following is the capital structure of a company.[10]

Answer

The figures given in the question

Source of capital	Bookvalue (₹)	Market value (₹)
Equity shares of ₹ 100 each	8,00,000	16,00,000
9% cumulative preference shares @ ₹ 100 each	2,00,000	2,40,000
11% debentures (₹ 100 each)	6,00,000	6,60,000
Retained earnings	4,00,000	-
Total	20,00,000	25,00,000

The current market price of the company's equity share is ₹ 200. For the last year the company had paid equity dividend at 25% and its dividend is likely to grow by 5% every year. The corporate tax rate is 30% and shareholders personal income tax rate is 20% calculate :

(i) Cost of capital for each source of capital.

(ii) Weighted average cost of capital on the basis of book value weights.

For full marks, cover: (i) the cost of equity by the dividend growth model from last year's dividend; the cost of retained earnings after the shareholders' personal tax; the cost of preference shares at their market price; the cost of debentures after tax at their market price; (ii) the WACC with book value weights; and a comment.

(i) Cost of each source of capital

1. Cost of equity (Ke). Last year's dividend was 25 per cent of Rs 100, that is Rs 25 a share. It grows at 5 per cent, so next year's dividend is D1 = 25 × 1.05 = 26.25. The market price is Rs 200.

Ke = D1 / P0 + g = 26.25 / 200 + 0.05 = 0.18125, or 18.125 per cent.

2. Cost of retained earnings (Kr). If profits were paid out, shareholders would pay personal tax of 20 per cent before reinvesting them. So retained earnings cost less than new equity:

Kr = Ke × (1 - personal tax rate) = 18.125 × (1 - 0.20) = 14.5 per cent.

3. Cost of preference shares (Kp). There are 2,00,000 / 100 = 2,000 shares with a market value of Rs 2,40,000, so each is worth 2,40,000 / 2,000 = 120. The dividend is 9 per cent of Rs 100, that is Rs 9.

Kp = 9 / 120 = 0.075, or 7.5 per cent.

4. Cost of debentures (Kd). There are 6,00,000 / 100 = 6,000 debentures with a market value of Rs 6,60,000, so each is worth 6,60,000 / 6,000 = 110. Interest is Rs 11, and tax is 30 per cent.

Kd = I (1 - t) / market price = 11 × (1 - 0.30) / 110 = 7.70 / 110 = 0.07, or 7 per cent.

Source	Cost (%)
Equity shares	18.125
Retained earnings	14.5
9% preference shares	7.5
11% debentures (after tax)	7.0

(ii) WACC on book value weights

Source	Book value (Rs)	Weight (%)	Cost (%)	Total cost (Rs)
Equity shares	8,00,000	40	18.125	1,45,000
9% preference shares	2,00,000	10	7.5	15,000
11% debentures	6,00,000	30	7.0	42,000

Source	Book value (Rs)	Weight (%)	Cost (%)	Total cost (Rs)
Retained earnings	4,00,000	20	14.5	58,000
Total	20,00,000	100		2,60,000

For example, 8,00,000 × 18.125/100 = 1,45,000.

WACC = 2,60,000 / 20,00,000 × 100 = 13 per cent.

Check by weights: 0.40 × 18.125 + 0.10 × 7.5 + 0.30 × 7 + 0.20 × 14.5 = 13 per cent.

Comment

Equity is the costliest source at 18.125 per cent, because shareholders bear the most risk. Retained earnings are cheaper at 14.5 per cent, as they save the shareholders' personal tax. Debentures are the cheapest at 7 per cent after tax, since interest is allowed as an expense. Preference shares and debentures are costed at their market prices, because the cost of capital must reflect what investors require today.

Conclusion. (i) The cost of equity is 18.125 per cent and of retained earnings 14.5 per cent. Preference shares cost 7.5 per cent and debentures 7 per cent after tax. (ii) The weighted average cost of capital on book value weights is 13 per cent (Rs 2,60,000 on Rs 20,00,000).

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