Neco Model Questions Vol1 2022 Commerce Question 8

Practice essay / theory question 8 from the 2022 Neco Model Questions Vol1 Commerce examination. This question covers Sources of Finance .

Neco Model Questions Vol1 2022 Commerce Essay / Theory
Topic: Sources of Finance
Question 8 NECO_MODEL_QUESTIONS_VOL1 • 2022 • COMMERCE • essay

Alpha Manufacturing Ltd. plans to expand its production capacity and estimates that N200 million is required for new machinery, building extensions and working capital. The firm is evaluating different sources of finance.

Question Parts

( a )
Define internal and external sources of finance and give two examples of each.
( b )
The firm can raise the required N200 million through (i) a 5‑year bank loan at 12% per annum, (ii) issuing 10% preference shares, or (iii) using retained earnings of N30 million and borrowing the balance. Assuming simple interest/straight‑line dividend calculations, compute the total cash outflow for each option over the 5‑year period.
( c )
Given a corporate tax rate of 30%, calculate the after‑tax cost of the bank loan option.
( d )
Considering the calculations above and other qualitative factors (such as control, financial risk and flexibility), recommend the optimal mix of finance for Alpha Manufacturing and justify your recommendation.

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About This Question

This is Neco Model Questions Vol1 2022 Commerce Question 8. It is one of the essay questions from the 2022 Neco Model Questions Vol1 Commerce examination.

The question covers Sources of Finance .

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