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Question 3
AllStarz Sdn. Bhd. requires RM350,000 in the short term to support the working capital requirements for 5 months. The company has the following alternatives:
Alternative 1
Borrow from Mewah Bank and pay an annual interest rate of 7.5% on a discounted basis.
The bank requires a 12% compensating balance. AllStarz maintains a demand deposit of RM20,000 in the bank.
Alternative 2
Issue commercial paper on a discount basis at an interest of 10% per annum. The dealer placement fee is RM5, 000 per paper and the par value of a commercial paper is RM50, 000 per paper.
Alternative 3
Foregoing a trade credit with a favourable term of 5/10, net 60
Alternative 4
AllStarz has a revolving credit agreement with Megah Bank for the total amount of RM400,000. Interest rate of 8% is charged on the used loan. A commitment fee of 5% is charged on the unused loan. On top of that, the bank requires that AllStarz maintains a checking account of RM20, 000.
i. Calculate the effective interest rates of the above financing alternatives
ii. Which is the best financing alternative for AllStarz Sdn. Bhd.? Why?
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