Convincing Features
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Question 5
Titan Company requires RM400,000 to support the working capital requirement for 3 months. The company is considering the below alternatives:
Alternative 1
Apply for a loan from CDG Bank that pays an annual interest rate of 7.5 percent on a discounted basis. The bank requires a 12 percent compensating balance. Titan maintains a demand deposit of RM40,000 in the bank.
Alternative 2
Titan has a revolving credit agreement with CDG Bank for the total amount of RM450,000. An interest rate at 8 percent is charged on the used loan. A commitment fee of 5 percent is charged on the unused loan. On top of that, the bank requires that Titan maintain a checking account of RM15,000.
Alternative 3
Issue commercial paper on a discounted basis at an interest rate of 10 percent per annum.
Dealer placement fee is RM3, 000 per paper and the par value of these commercial papers are RM40, 000 each.
Alternative 4
Foregoing a trade credit with favourable term of 5/15 net 50.
i. Compute the effective interest rates of the above financing alternatives.
ii. Determine the best financing alternative should the company choose. Why?
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