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B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2025 Jan 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

2025 Jan 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 2025 Jan examination.

The questions below are the paper as Karnataka State Law University set it at the 2025 Jan examination, in the order it was set.

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The Paper as Set

The questions in this volume are the questions asked at the 2025 Jan 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.

Read the original question paper

Q1

Unit I

(a)Sri company has on its book, the following capital structure.[10]

Answer

The figures given in the question

	₹
Equity share	40,00,000
6% preference share	10,00,000
8% debentures	30,00,000
Total	80,00,000

Market price of equity share is ₹ 20. It is expected that the company will pay dividend of ₹ 2 per share which will grow at 7%. The tax rate may be presumed at 40%.

a) Calculate WACC on existing structure.

b) Calculate the new WACC when the Co. raises an addition of ₹ 20,00,000 debt by issuing 10% debentures. This would increase the expected dividend to ₹ 3 and leave growth rate unchanged but price of share will fall to ₹ 15 per share.

For full marks, cover: the cost of equity by the dividend growth model; the cost of preference shares; the cost of debentures after tax; the WACC on the existing structure; then the new cost of equity, the cost of the new debentures and the new WACC after Rs 20,00,000 of debt is added; and a comment on why the WACC rises.

Formulae

Cost of equity (dividend growth model): Ke = D1 / P0 + g, where D1 is the expected dividend, P0 the market price and g the growth rate.
Cost of preference shares: Kp = the preference dividend rate, as the shares are taken at par.
Cost of debentures after tax: Kd = interest rate × (1 - tax rate), as the debentures are taken at par.
WACC = the total of (weight × cost) of each source. Book values are the weights, as no market values of the sources are given.

(a) WACC on the existing structure

Specific costs.

Ke = 2 / 20 + 0.07 = 0.17, that is 17 per cent.
Kp = 6 per cent.
Kd = 8 × (1 - 0.40) = 4.8 per cent.

Source	Amount (Rs)	Weight	Cost (%)	Weighted cost (%)
Equity shares	40,00,000	0.500	17.0	8.50
6% preference shares	10,00,000	0.125	6.0	0.75
8% debentures	30,00,000	0.375	4.8	1.80
Total	80,00,000	1.000		11.05

The weights are 40,00,000 / 80,00,000 = 0.5, 10,00,000 / 80,00,000 = 0.125 and 30,00,000 / 80,00,000 = 0.375.

Check by the total cost method.

Source	Amount (Rs)	Cost (%)	Cost (Rs)
Equity shares	40,00,000	17.0	6,80,000
6% preference shares	10,00,000	6.0	60,000
8% debentures	30,00,000	4.8	1,44,000
Total	80,00,000		8,84,000

WACC = 8,84,000 / 80,00,000 × 100 = 11.05 per cent.

(b) WACC after raising Rs 20,00,000 of 10% debentures

New specific costs.

The expected dividend rises to Rs 3 and the price falls to Rs 15. So Ke = 3 / 15 + 0.07 = 0.27, that is 27 per cent. The new Ke applies to all the equity, because the market now prices all the shares on the higher risk.
Kp stays at 6 per cent.
The old debentures still cost 8 × (1 - 0.40) = 4.8 per cent.
The new debentures cost 10 × (1 - 0.40) = 6 per cent.

Source	Amount (Rs)	Weight	Cost (%)	Weighted cost (%)
Equity shares	40,00,000	0.40	27.0	10.80
6% preference shares	10,00,000	0.10	6.0	0.60
8% debentures	30,00,000	0.30	4.8	1.44
10% debentures	20,00,000	0.20	6.0	1.20
Total	1,00,00,000	1.00		14.04

Check by the total cost method.

Source	Amount (Rs)	Cost (%)	Cost (Rs)
Equity shares	40,00,000	27.0	10,80,000
6% preference shares	10,00,000	6.0	60,000
8% debentures	30,00,000	4.8	1,44,000
10% debentures	20,00,000	6.0	1,20,000
Total	1,00,00,000		14,04,000

WACC = 14,04,000 / 1,00,00,000 × 100 = 14.04 per cent.

Comment

Debt is the cheapest source here. Yet the WACC rises from 11.05 to 14.04 per cent. The extra debt raises the risk borne by the equity shareholders, so the share price falls from Rs 20 to Rs 15. The cost of equity jumps from 17 to 27 per cent. That rise outweighs the cheap new debt. So the new borrowing is not advisable on these figures.

Conclusion. (a) The WACC on the existing structure is 11.05 per cent (Ke 17 per cent, Kp 6 per cent, Kd 4.8 per cent). (b) After Rs 20,00,000 of 10 per cent debentures, Ke rises to 27 per cent and the WACC rises to 14.04 per cent. The extra debt makes the capital costlier, not cheaper.

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