Convincing Features
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Question 1
Altech Company requires RM500,000 to support the working capital requirements for the next 9 months. There are several alternatives for financing as below:
a) Borrow from Orient Bank and pay an annual interest rate of 8 percent on a discounted basis. The bank requires a 12 percent compensating balance. A company maintains a demand deposit of RM40,000 in the bank that can be used to meet part of the compensating balance requirement.
b) Altech Company also has a revolving credit agreement with SDO Bank for the total amount of RM550, 000 with an interest rate of 6 percent. A commitment fee of 5% is charged on the unused loan. SDO Bank also requires a company to maintain a deposit of RM20, 000 in an account.
c) Issue commercial paper on a discount basis at an interest rate of 10 percent per annum. The dealer placement fee is RM2,000 per paper and the par value of these commercial papers is RM50,000 each.
d) Foregoing a trade credit with favorable term of 5/20 net 60.
i. Calculate the effective costs of the above alternatives. (16 marks)
ii. State which financing alternative should be chosen by the company and discuss why.
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