Neco 2021 Commerce Question 30

Practice objective / multiple choice question 30 from the 2021 Neco Commerce examination.

Neco 2021 Commerce Objective / Multiple Choice Medium Difficulty
Question 30 NECO • 2021 • COMMERCE • objective

A company needs to raise \(\text{₦}50\) million. It can use three sources of finance:\n\n1. Retained earnings - cost of capital 8\%.\n2. Bank loan - nominal cost 12\% per annum; corporate tax rate is 30\%.\n3. New equity - cost of capital 15\%.\n\nThe firm wants to keep the proportion of debt (bank loan) at or below 40\% of the total capital raised. Determine the financing mix (in millions of naira) that minimises the weighted average cost of capital (WACC) while satisfying the debt‑proportion constraint, and compute the resulting WACC (to two decimal places).

Answer Options

A. Retained earnings ₦30 million, bank loan ₦15 million, new equity ₦5 million; WACC = 8.30%
Correct Answer B. Retained earnings ₦30 million, bank loan ₦20 million, new equity ₦0 million; WACC = 8.16%
C. Retained earnings ₦25 million, bank loan ₦20 million, new equity ₦5 million; WACC = 8.45%
D. Retained earnings ₦35 million, bank loan ₦10 million, new equity ₦5 million; WACC = 8.05%
Correct Answer
B
Correct Option:
Retained earnings ₦30 million, bank loan ₦20 million, new equity ₦0 million; WACC = 8.16%

About This Question

This is Neco 2021 Commerce Question 30. It is one of the objective questions from the 2021 Neco Commerce examination.

Difficulty level: Medium .

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