Waec Model Questions Vol1 2018 Commerce Question 5

A small business requires ₦5,000,000 for expansion. It can obtain finance from three sources: 1. Bank loan: interest 12 % per annum, processing fee 1 % of the loan amount, repayable in equal annual installments over 3 years. 2. Trade credit from suppliers: 0 % interest if paid within 60 days, but a penalty of 2 % of the amount due is charged for each month of delay beyond 60 days. The business expects to delay payment by exactly 2 months. 3. Issue of 5‑year corporate bonds: nominal interest 10 % per annum payable annually, issuance cost 2 % of the total bond issue. Assuming the business will use the funds for exactly one year and then repay the principal, calculate the effective cost (as a percentage of the amount borrowed) for each source for that year and identify which source is cheapest.