Gce Model Questions Vol1 2022 Commerce Question 8

Practice essay / theory question 8 from the 2022 Gce Model Questions Vol1 Commerce examination. This question covers Sources of Finance .

Gce Model Questions Vol1 2022 Commerce Essay / Theory

Topic: Sources of Finance

Question 8 GCE_MODEL_QUESTIONS_VOL1 • 2022 • COMMERCE • essay

Alpha Manufacturing Ltd intends to raise ₦50 million to expand its production capacity. The board is considering four possible sources of finance:

Question Parts

( a )

Calculate the cost of each source of finance using the data below: - Retained earnings: ₦15 million (no explicit cost). - Bank loan: ₦12.5 million at 8 % per annum interest. Corporate tax rate is 30 %. - Preference shares: ₦10 million of 5 % cumulative preference shares, issued at par. - Ordinary shares: ₦12.5 million to be raised by issuing new ordinary shares. The current market price of the shares is ₦18 per share, the expected dividend next year is ₦1.20 per share and the expected growth rate of dividends is 5 % per annum.

( b )

Using the costs obtained in part (a) and the proposed proportion of each source (30 % retained earnings, 25 % bank loan, 20 % preference shares, 25 % ordinary shares), compute the weighted average cost of capital (WACC) for the expansion project.

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About This Question

This is Gce Model Questions Vol1 2022 Commerce Question 8. It is one of the essay questions from the 2022 Gce Model Questions Vol1 Commerce examination.

The question covers Sources of Finance .

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