- 11 Marks
Question
a. Dinpa Supermarket is considering acquiring a loan of GH₵300,000 from Abrempong Bank Ltd. The loan is payable in five equal annual installments at an interest rate of 25%. Dinpa Ltd has consulted you to determine their annual repayment amount and the interest thereon.
Required:
i. Prepare a repayment schedule for Dinpa indicating clearly the interest payment and the principal repayment. (8 marks)
ii. State THREE (3) advantages of a term loan over an overdraft facility. (3 marks)
Answer
a (ii) Advantages of term loan over overdraft
- interest charged is not predictable, as it depends on a variable interest rate and on the
amount overdrawn on each day of the charging period - the lender may not grant the entire amount requested, as changing financial situation of
the business will be taken into consideration - overdrafts are repayable on demand, which may occur at a time when management are
not ready - company may be forced to convert a hardcore overdraft into a loan term which can affect
capital structure especially where the preference for overdraft was for managing the
capital structure - management will need to spend time strictly monitoring their accounts to ensure they
operate within the overdraft limit. - time will need to be spent preparing management accounts and monitoring compliance
with covenants
- Tags: Interest Payment, Loan Repayment, Principal Repayment
- Level: Level 2
- Topic: Introduction to Financial Management
- Series: NOV 2015
- Uploader: Kwame Aikins