Waec Model Questions Vol1 2019 Commerce Question 26

A trader needs to raise exactly ₦480,000 net cash for a 2‑year project. He can obtain finance through one of the following: (i) Bank loan: nominal interest 12% per annum payable annually. The loan is discounted at 5% (i.e., the borrower receives 95% of the face value). The loan is for 2 years; the face value is repaid at the end of the second year together with the interest for each year on the face value. (ii) Issue of 2‑year debentures: nominal interest 10% per annum payable annually. Debentures are issued at 96% of face value (i.e., a 4% discount). No other charges. (iii) Issue of ordinary shares with a nominal value of ₦100 each, issued at par. The company promises to pay a dividend of 8% of the nominal value each year for the 2‑year period. Assuming the business wants the net cash of ₦480,000 now, which source of finance has the lowest effective cost of finance over the 2‑year period? Express the effective cost as a percentage (to two decimal places).