Neco 2020 Commerce Question 8

Practice essay / theory question 8 from the 2020 Neco Commerce examination. This question covers Sources of Finance .

Neco 2020 Commerce Essay / Theory

Topic: Sources of Finance

Question 8 NECO • 2020 • COMMERCE • essay

ABC Manufacturing Ltd plans to purchase new machinery that costs ₦12,000,000. The firm is evaluating four possible sources of finance: (i) a 5‑year bank loan at 12% per annum payable annually, (ii) issuing 10% debentures with a face value of ₦1,000 each, (iii) leasing the machinery on a 5‑year lease with annual payments of ₦3,200,000, and (iv) retaining earnings of ₦2,500,000.

Question Parts

( a )

Calculate the total amount of interest payable over the life of the bank loan and the total amount that will be repaid at the end of the 5‑year period.

( b )

If the debentures are issued at a discount of 5% on face value, determine (i) the net proceeds received by the company and (ii) the annual interest expense on the debentures.

( c )

Compute the effective annual cost of the lease (ignore tax) and compare it with the average annual cost of the bank loan (interest only) and the debenture interest.

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About This Question

This is Neco 2020 Commerce Question 8. It is one of the essay questions from the 2020 Neco Commerce examination.

The question covers Sources of Finance .

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