ABC Ltd needs ₦10 million for a new project. It can obtain the funds by either:

Option A - a bank loan of ₦10 million at 12 % per annum payable annually. An arrangement fee of 2 % of the loan amount is charged at the start, and the loan is to be repaid in equal annual instalments over 5 years.

Option B - issuing 10‑year debentures of ₦10 million at 10 % per annum payable semi‑annually. An issue cost of 1.5 % of the amount is payable at issuance, and only interest is paid each half‑year; the principal is repaid at the end of 10 years.

Which option results in the lower total cash outflow during the first 5 years? State the total cash outflow for the preferred option.

Question

ABC Ltd needs ₦10 million for a new project. It can obtain the funds by either:

Option A - a bank loan of ₦10 million at 12 % per annum payable annually. An arrangement fee of 2 % of the loan amount is charged at the start, and the loan is to be repaid in equal annual instalments over 5 years.

Option B - issuing 10‑year debentures of ₦10 million at 10 % per annum payable semi‑annually. An issue cost of 1.5 % of the amount is payable at issuance, and only interest is paid each half‑year; the principal is repaid at the end of 10 years.

Which option results in the lower total cash outflow during the first 5 years? State the total cash outflow for the preferred option.

Accepted Answer

Option B, total cash outflow ₦5,150,000

Gce Model Questions Vol1 2024 Commerce Question 23

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