Neco 2017 Commerce Question 8

Practice essay / theory question 8 from the 2017 Neco Commerce examination. This question covers Sources of Finance .

Neco 2017 Commerce Essay / Theory

Topic: Sources of Finance

Question 8 NECO • 2017 • COMMERCE • essay

A manufacturing company is planning to expand its production capacity and needs to raise ₦5,000,000.

Question Parts

( a )

Define short‑term and long‑term sources of finance. Provide two examples of each and explain one advantage of each example.

( b )

The company can obtain the required ₦5,000,000 either (i) by a bank loan at 12% per annum payable annually, or (ii) by issuing 10% debentures with a face value of ₦1,000 each, a market price of ₦950, and flotation costs of 2% of the issue amount. The debentures mature in 5 years with interest payable annually. Calculate the effective annual cost of each source of finance and recommend the cheaper option.

( c )

Discuss how the choice between the bank loan and debenture issue would affect the company's (i) debt‑to‑equity ratio, (ii) interest‑coverage ratio, and (iii) overall financial risk.

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About This Question

This is Neco 2017 Commerce Question 8. It is one of the essay questions from the 2017 Neco Commerce examination.

The question covers Sources of Finance .

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