MKM Resources Berhad requires RM500,000 to support the working capital requirements for the next 9 months: Financial Management Assignment, UiTM, Malaysia

QUESTION 1

• MKM Resources Berhad requires RM500,000 to support the working capital requirements for the next 9 months. There are several alternatives for financing them as below:
  i) Borrow from WVE Bank and pays an annual interest rate of 9 percent on a discounted basis. The bank requires a 10 percent compensating balance. A company currently maintains a demand deposit of RM30,000 in the bank.
  ii) Issue commercial paper 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 paper are RM25,000 each.

Calculate the effective costs of the above alternatives.

• MKM Bhd is currently faced with capital rationing, the company thinks that the profitability index (PI) can be used to select the best projects. Provide your explanation on why doesn’t choosing the projects with the highest P1 always leads to the best decision.

QUESTION 2

Answer

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