Neco 2022 Commerce Question 24

Practice objective / multiple choice question 24 from the 2022 Neco Commerce examination.

Neco 2022 Commerce Objective / Multiple Choice Medium Difficulty
Question 24 NECO • 2022 • COMMERCE • objective

A firm needs external finance of \(\text{₦}8,000,000\). It can either (i) issue new shares at \(\text{₦}200\) each, incurring a flotation cost of \(3\%\) of the issue amount, or (ii) retain earnings. The firm's profit before tax is \(\text{₦}2,400,000\) and the tax rate is \(30\%\). If it adopts a dividend‑payout ratio of \(40\%\) of after‑tax profit, what is the maximum amount of finance that can be obtained from retained earnings? Also compute the net proceeds from the share issue and state which source provides the larger amount of finance.

Answer Options

Correct Answer A. Retained earnings: ₦1,008,000; Share issue net proceeds: ₦7,760,000; Share issue is larger
B. Retained earnings: ₦1,008,000; Share issue net proceeds: ₦7,600,000; Share issue is larger
C. Retained earnings: ₦1,008,000; Share issue net proceeds: ₦7,760,000; Retained earnings are larger
D. Retained earnings: ₦960,000; Share issue net proceeds: ₦7,760,000; Share issue is larger
Correct Answer
A
Correct Option:
Retained earnings: ₦1,008,000; Share issue net proceeds: ₦7,760,000; Share issue is larger

About This Question

This is Neco 2022 Commerce Question 24. It is one of the objective questions from the 2022 Neco Commerce examination.

Difficulty level: Medium .

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