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B.Com. LL.B. (Five Years) Sem 4 Financial Management 2015 Jun (100 marks) Question Paper with Solutions

KSLU Solved Question Papers

Financial Management

Previous Year Question Paper with Solution

B.Com. LL.B. (Five Years) · Sem 4

2015 Jun (100 marks) Examination

munotes.in

Mumbai

First published on munotes.in on 21 October 2026.

Published by munotes.in, Mumbai.

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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2015 Jun (100 marks) examination.

The questions below are the paper as Karnataka State Law University set it at the 2015 Jun (100 marks) examination, in the order it was set.

MarksPage

The Paper as Set

The questions in this volume are the questions asked at the 2015 Jun (100 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 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

Q1The Kaveri company is planning to expand its business and accordingly the company desires to increase assets by 50% by the end of the year 2013. The existing capital structure is as given below :[16]

Answer

The figures given in the question

Particulars	Rs.
Equity Shares (Par value of Rs. 100 per share)	10,00,000
10% Preference Shares (Par value of Rs. 100 per share)	2,00,000
9% Debentures (Par value Rs. 1000 per debenture)	8,00,000
Total	20,00,000

New debentures can be sold at par at 12% interest rate.

Preference shares will have a 14% dividend rate and sold at par. Equity shares can be sold at net Rs. 90 per share. The shareholders required rate of return is 9% which is expected to grow at 5%. Retained earnings for the year are estimated to be Rs. 1,00,000.

You are required to compute the cost of individual capital components and the overall cost of capital.

For full marks, cover: how much new capital is needed and how it is split to keep the existing structure; the cost of each component (new debentures, new preference shares, retained earnings and new equity), with the reading of "9% growing at 5%" stated; the weighted cost of the new capital; a check by weights; and a comment.

Step 1: new capital needed and its mix

The company's assets are financed by its capital of Rs 20,00,000. To increase them by 50 per cent it needs 20,00,000 × 50/100 = 10,00,000 of new capital. It is taken that the company keeps its present capital structure.

Source	Existing (Rs)	Proportion	New capital (Rs)
Equity	10,00,000	50%	5,00,000
Preference shares	2,00,000	10%	1,00,000
Debentures	8,00,000	40%	4,00,000
Total	20,00,000	100%	10,00,000

The new equity of Rs 5,00,000 comes first from the year's retained earnings of Rs 1,00,000. The remaining 5,00,000 - 1,00,000 = 4,00,000 comes from a new issue of equity shares.

No tax rate is given, so the costs are worked without a tax adjustment.

Step 2: cost of each component

1. New debentures (Kd). Sold at par at 12 per cent interest, so Kd = 12 per cent.

2. New preference shares (Kp). Sold at par with a 14 per cent dividend, so Kp = 14 per cent.

3. Cost of equity. The paper speaks of a "required rate of return of 9 per cent, expected to grow at 5 per cent". It is read as a dividend of Rs 9 a share, which is 9 per cent of the Rs 100 par value. The dividend grows at 5 per cent a year.

Retained earnings (Kr): no issue cost, so the dividend is related to the par (market) value of Rs 100. Kr = 9 / 100 + 0.05 = 0.14, or 14 per cent.
New equity (Ke): each new share brings in only Rs 90 after issue costs. Ke = 9 / 90 + 0.05 = 0.15, or 15 per cent.

Component	Cost (%)
New 12% debentures	12
New 14% preference shares	14

Component	Cost (%)
Retained earnings	14
New equity shares	15

Step 3: overall cost of the new capital

Source	Amount (Rs)	Cost (%)	Total cost (Rs)
Retained earnings	1,00,000	14	14,000
New equity shares	4,00,000	15	60,000
Preference shares	1,00,000	14	14,000
Debentures	4,00,000	12	48,000
Total	10,00,000		1,36,000

Overall cost of capital = 1,36,000 / 10,00,000 × 100 = 13.6 per cent.

Check by weights. 0.10 × 14 + 0.40 × 15 + 0.10 × 14 + 0.40 × 12 = 1.4 + 6 + 1.4 + 4.8 = 13.6 per cent.

Comment

This is the marginal cost of capital: the cost of the additional Rs 10,00,000 the company must raise. It is higher than the cost of the old capital. The new debentures and preference shares carry higher rates: 12 and 14 per cent against 9 and 10 per cent. New equity also bears an issue cost. The company should undertake the expansion only if the new assets are expected to earn at least 13.6 per cent.

If a tax rate were given, the cost of the debentures would fall to 12 × (1 - tax rate), and the overall cost would be lower.

Conclusion. The new debentures cost 12 per cent and the preference shares 14 per cent. Retained earnings cost 14 per cent and new equity 15 per cent. With the Rs 10,00,000 raised in the existing proportions, the overall cost of the new capital is 13.6 per cent.

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