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Calculate the effective interest rate for each alternative

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Reference no: EM132809245

Trimax Sdn Bhd need RM550,000 to support its working capital requirement for 6 month. The management has identified several possible alternatives for this purpose. The alternatives are as follows:

ALTERNATIVE 1

Borrows from Rich Bank in the form of discounted loan which charge an annual interest rate of 8%. Rich Bank requires 10% compensating balance. Trimax Sdn. Bhd. normally maintains a demand deposit of RM20,000 in the Rich Bank.

ALTERNATIVE 2

Trimax Sdn Bhd has a revolving credit agreement with Berjaya Bank for the total amount of RM600,000. The interest rate is 7.5% for the used loan and the commitment fee of 5% is charged on the unused loan. In addition, the Berjaya Bank requires Trimax Sdn Bhd to maintain RM10,000 of checking deposit.

ALTERNATIVE 3

Issue commercial paper on a discounted basis at 12% interest rate. The par value of commercial paper is RM55,000 per paper. The placement fee is RM4,000 per paper.

ALTERNATIVE 4

Foregoing a trade credit with a favourable term of 5/25 net 60.

problem a) Calculate the effective interest rate for each alternative.

problem b) Which is the best alternative for Trimax Sdn. Bhd. and why?

Reference no: EM132809245

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