Waec Model Questions Vol1 2019 Commerce Question 8

Practice essay / theory question 8 from the 2019 Waec Model Questions Vol1 Commerce examination. This question covers Sources of Finance .

Waec Model Questions Vol1 2019 Commerce Essay / Theory
Topic: Sources of Finance
Question 8 WAEC_MODEL_QUESTIONS_VOL1 • 2019 • COMMERCE • essay

ABC Manufacturing Ltd is planning to introduce a new product line. The projected cash outflow for the project is ₦30,000,000, to be incurred at the start of the project. The company expects the project to generate cash inflows of ₦12,000,000 at the end of each of the next three years. The firm currently has retained earnings of ₦10,000,000 and a line of credit with a bank that can be drawn up to ₦15,000,000 at an interest rate of 10% per annum payable annually. The company also has the option to issue 5‑year debentures at a coupon rate of 9% with a flotation cost of 2% of the issue amount, and to raise equity by issuing new ordinary shares at a market price of ₦500 per share, with an expected dividend yield of 8%.

Question Parts

( a )
Identify and explain two internal and two external sources of finance that ABC Manufacturing could use for the project, highlighting the main features of each source.
( b )
Calculate the total cost (including interest and flotation costs) of financing the project using the bank line of credit for the required amount, assuming the entire ₦30,000,000 is borrowed and repaid at the end of year 3.
( c )
Determine the amount of debentures that must be issued to raise the remaining financing after using retained earnings and the bank line of credit, and compute the annual interest payment on those debentures (ignore tax effects). Show your working.

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About This Question

This is Waec Model Questions Vol1 2019 Commerce Question 8. It is one of the essay questions from the 2019 Waec Model Questions Vol1 Commerce examination.

The question covers Sources of Finance .

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