Neco 2019 Commerce Question 42

Practice objective / multiple choice question 42 from the 2019 Neco Commerce examination.

Neco 2019 Commerce Objective / Multiple Choice Medium Difficulty
Question 42 NECO • 2019 • COMMERCE • objective

An enterprise requires ₦5,000,000 for expansion. Option A is a bank loan with an annual interest rate of 12\% payable at year‑end and a processing fee of 1\% of the loan amount. Option B is a 10‑year debenture issue with a 10\% annual coupon, a flotation cost of 2\% of the issue amount, and the flotation cost is amortised straight‑line over the 10 years. Assuming the bank loan is repaid after one year while the debentures are held to maturity, calculate the effective annual cost (as a percentage of net proceeds) for each option for the first year and state which option is cheaper.

Answer Options

A. Both options have similar costs; effective cost ≈ 10.9\\% (bank loan ≈ 10.9\\%).
B. Debenture option is cheaper; effective cost ≈ 9.8\\% (bank loan ≈ 13.5\\%).
C. Bank loan option is cheaper; effective cost ≈ 11.2\\% (debenture ≈ 12.5\\%).
Correct Answer D. Debenture option is cheaper; effective cost ≈ 10.4\% (bank loan ≈ 13.1\%).
Correct Answer
D
Correct Option:
Debenture option is cheaper; effective cost ≈ 10.4\% (bank loan ≈ 13.1\%).

About This Question

This is Neco 2019 Commerce Question 42. It is one of the objective questions from the 2019 Neco Commerce examination.

Difficulty level: Medium .

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