Neco Model Questions Vol1 2021 Commerce Question 17

A company needs \(10{,}000{,}000\) Naira of finance. It can obtain the funds either through a bank loan or by issuing preference shares. Option A - Bank loan: interest rate 12 % per annum payable annually, tax rate 30 % (interest is tax‑deductible), arrangement fee 2 % of the loan amount payable at the start, and the loan is to be repaid in a lump sum after 5 years (interest only each year). Option B - Preference shares: dividend rate 10 % per annum, no tax shield, issue cost 1 % of the proceeds payable at the start, and the shares are perpetual. Assuming the arrangement and issue costs are amortised over the 5‑year period, which source has the lower annual after‑tax cost of finance? State the annual cost as a percentage of the principal for each option and indicate the cheaper source.