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Question 2
The Sunrise Corporation requires RM150,000 in short-term projects for 270 days. The management team has identified four suitable sources for the project as the followings:
Source 1
Forego trade credit with the following terms: 2/10, net 40.
Source 2
Issue two commercial papers at a 12% annual interest rate with a placement fee of RM2,000 per paper. The par value of each paper is RM75,000.
Source 3
Borrow from Bank Alley at 12% per annum on a discount basis with 5% compensating balance requirement. Sunrise Corporation normally maintains an account of RM5,000 in the bank.
Source 4
The firm has a revolving credit agreement amounting to RM250, 000. The commitment fee on the unused loan portion is 2%. The annual interest rate on the loan is 1.5% above the current rate of 9% and there is a compensating balance requirement of 10% on the unused loan amount.
i. Calculate the effective costs of the above sources of financing (16 marks)
ii. State which financial source should be chosen by the Sunrise Corporation and discuss why.
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