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B.Com. LL.B. (Five Years) Sem 4 Financial Management 2022 Oct Question Paper with Solutions

KSLU Solved Question Papers

Financial Management

Previous Year Question Paper with Solution

B.Com. LL.B. (Five Years) · Sem 4

2022 Oct 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 2022 Oct examination.

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

MarksPage

The Paper as Set

The questions in this volume are the questions asked at the 2022 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

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 only.

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 capital structure of Finetech Ltd. is as under :[10]

Answer

The figures given in the question

	₹
9% Debentures of ₹ 100 each	5,50,000
11% Preference shares of ₹ 100 each	4,50,000
Equity shares of ₹ 10 per share	10,00,000
Total	20,00,000

Additional Information :

(i) ₹ 100 per debenture redeemable at par has 2% floatation cost and 10 years of maturity. The market price per debenture is ₹ 105.

(ii) ₹ 100 per preference share redeemable at par has 3% floatation cost and 10 years of maturity. The market price per preference share is ₹ 106.

(iii) Equity share has market price per share of ₹ 20. The next year's expected dividend is ₹ 2 per share with annual growth of 5%. The firm has a practice of paying the earnings in the form of dividends.

(iv) Corporate income tax rate is 35%.

You are required to calculate :

(a) Cost of each source of capital.

(b) Weighted average cost of capital using market value weights.

For full marks, cover: (a) the net proceeds of a debenture and a preference share after flotation cost; the cost of redeemable debentures after tax and of redeemable preference shares by the short-cut formula; the cost of equity by the dividend growth model; (b) the market values of the three sources; the WACC with market value weights; and a short comment.

(a) Cost of each source

1. Cost of debentures (Kd).

The debenture sells at Rs 105, and flotation cost is 2 per cent of that price. So the net proceeds are 105 × 98/100 = 102.90. It is redeemed at par (Rs 100) in 10 years. Interest is 9 per cent, and tax is 35 per cent.

Kd = [I (1 - t) + (RV - NP) / n] / [(RV + NP) / 2]

I (1 - t) = 9 × (1 - 0.35) = 5.85.

(RV - NP) / n = (100 - 102.90) / 10 = -0.29. It is negative because the debenture is issued above its redemption value.
Average of RV and NP: (100 + 102.90) / 2 = 101.45.

Kd = (5.85 - 0.29) / 101.45 = 5.56 / 101.45, which comes to 5.48 per cent.

2. Cost of preference shares (Kp).

Net proceeds = 106 × 97/100 = 102.82. Redeemable at par in 10 years. Dividend 11 per cent. No tax adjustment, as preference dividend is paid out of profit after tax.

Kp = [D + (RV - NP) / n] / [(RV + NP) / 2]

(RV - NP) / n = (100 - 102.82) / 10 = -0.282.
Average of RV and NP: (100 + 102.82) / 2 = 101.41.

Kp = (11 - 0.282) / 101.41 = 10.718 / 101.41, which comes to 10.57 per cent.

3. Cost of equity (Ke).

Ke = D1 / P0 + g = 2 / 20 + 0.05 = 0.15, or 15 per cent.

The firm pays out all its earnings as dividend, so no separate cost of retained earnings arises.

(b) WACC with market value weights

Market values.

Source	Number	Market price (Rs)	Market value (Rs)
9% debentures (5,50,000 / 100)	5,500	105	5,77,500
11% preference shares (4,50,000 / 100)	4,500	106	4,77,000
Equity shares (10,00,000 / 10)	1,00,000	20	20,00,000

Total market value = 5,77,500 + 4,77,000 + 20,00,000 = 30,54,500.

WACC.

Source	Market value (Rs)	Cost (%)	Total cost (Rs)
9% debentures	5,77,500	5.48	31,647.00
11% preference shares	4,77,000	10.57	50,418.90
Equity shares	20,00,000	15.00	3,00,000.00
Total	30,54,500		3,82,065.90

WACC = 3,82,065.90 / 30,54,500 × 100, which comes to 12.51 per cent.

Check by weights. The weights are 18.91, 15.62 and 65.48 per cent. Then 0.1891 × 5.48 + 0.1562 × 10.57 + 0.6548 × 15 gives about 12.51 per cent.

Comment

Debentures are the cheapest source, at 5.48 per cent after tax, because interest is a tax-deductible expense. Equity is the costliest, at 15 per cent. Equity forms nearly two-thirds of the capital at market value, so it pulls the WACC up to about 12.51 per cent.

Note. If the flotation cost is taken as 2 and 3 per cent of the face value instead, the net proceeds are Rs 103 for both. Kd then comes to about 5.47 per cent and Kp to about 10.54 per cent, and the WACC changes very little.

Conclusion. (a) The cost of the debentures is about 5.48 per cent after tax. The preference shares cost about 10.57 per cent and equity 15 per cent. (b) With market value weights (total Rs 30,54,500), the weighted average cost of capital is about 12.51 per cent.

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