Gce Model Questions Vol1 2023 Commerce Question 8

For each source, calculate the total cash outflow over the first two years and state the effective cost of that source (interest or lease payments, or implied cost of equity). The sources are: (i) Retained earnings of ₦5 000 000 (no cash outflow). (ii) A bank term loan of ₦8 000 000 at 12 % per annum repayable over 5 years (use straight‑line amortisation for simplicity). (iii) Operating lease of the equipment costing ₦7 000 000 with an annual lease payment equal to 10 % of the asset value. (iv) Equity finance from a venture‑capital firm in exchange for 30 % of the company’s equity (assume the VC expects a 20 % return on its investment). (v) A government grant of ₦2 000 000 which does not require repayment but is conditional on meeting performance targets.

Using the calculations in part (a), recommend an optimal mix of the five sources to meet the ₦20 000 000 requirement. Justify your recommendation on the basis of cost, risk and any non‑financial considerations.

Discuss how the mix you have recommended would affect XYZ Ltd’s key financial ratios (debt‑to‑equity ratio and interest‑coverage ratio) for the first three years of operation.