Neco Model Questions Vol1 2017 Commerce Question 8

Practice essay / theory question 8 from the 2017 Neco Model Questions Vol1 Commerce examination. This question covers Sources of Finance .

Neco Model Questions Vol1 2017 Commerce Essay / Theory
Topic: Sources of Finance
Question 8 NECO_MODEL_QUESTIONS_VOL1 • 2017 • COMMERCE • essay

ABC Manufacturing Co. requires additional funds to expand its production capacity. The firm is evaluating three sources of finance: (i) a bank term loan of ₦5,000,000 at 12% per annum payable over 5 years, (ii) issuing 10,000 ordinary shares at ₦800 each, (iii) a 5‑year debenture issue of ₦4,000,000 at 10% per annum with a flotation cost of 2% of the issue amount.

Question Parts

( a )
Calculate the annual interest payment on the bank loan and the total interest payable over the loan period.
( b )
Determine the total amount of capital that would be raised if the ordinary shares are issued, and compute the annual cost of equity assuming the shareholders require a rate of return of 15% per annum.
( c )
Compute the net proceeds from the debenture issue after flotation costs and calculate the annual interest expense. Also, determine the effective interest rate (cost of debt) taking into account the flotation cost.
( d )
Considering the calculations and the qualitative factors such as control dilution and financial risk, recommend the optimal mix of these three sources for ABC Manufacturing. Provide a justified recommendation.

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About This Question

This is Neco Model Questions Vol1 2017 Commerce Question 8. It is one of the essay questions from the 2017 Neco Model Questions Vol1 Commerce examination.

The question covers Sources of Finance .

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