Reference no: EM132566058

ABC Resources Berhad requires RM500,000 to support the working capital requirements for the next 9 months. There are several alternatives of financing the as below:

i) Borrow from WVE Bank and pays annual interest rate at 9 percent on a discounted basis. The bank requires a 10 percent compensating balance. A company currently maintains a demand deposit of RM30,000 in the bank.

ii) MKM Resources also has a revolving credit agreement with AK Bank for the total amount of RM540,000 with an interest rate of 6 percent. A commitment fee of 2 percent is charged on the unused loan. AK Bank also require a company to maintain a deposit of RM20,000 in an account.

iii) Issue commercial paper at an interest rate of 10 percent per annum. Dealer placement fee is RM2,000 per paper and the par value of these commercial paper are RM25,000 each.

iv) Financing offer from CMC Bank that pays interest of 10 percent per annum. The bank requires a 15 percent compensating balance.

Calculate the effective costs of the above alternatives and state which one should be chosen by the company and its reason.