Reference no: EM133141740

Question - Donut and Keria Corporation is facing shortage for this 7 months period. They need to find RM750,000 to support their short term project. The company has the following financial alternatives. Compute the effective interest rate for each alternative.

i) Borrow from SCC Bank and pays an annual interest rate 7 percent on discounted basis. The bank requires a 12 percent compensating balance. A company maintains demand deposit of RM 50,000 in the bank that can be used to meet part of compensating balance requirement.

ii) Donut and Keria Corporation also has a revolving credit agreement with OCOD Bank for the total amount of RM800,000 with 10 percent interest rate. A commitment fee of 5 percent is charged on unused loan. OCOD Bank also requires company to maintain a deposit of RM40,000 in an account.

iii) Issue a Commercial Paper on a discounted basis at an interest rate of 10% per annum. Dealer placement fee is RM2,500 per paper and the PV of these commercial paper is RM20,000.

iv) Foregoing a trade credit with favorable term 5/20 net 60.

v) Choose the best source of financing for the company and provide the reason for your answer.