1. **Problem Statement:** Delima Holdings Bhd. needs RM950,000 for 8 months and is considering four financing alternatives. We need to calculate the Effective Interest Rate (EIR) for each and determine the best option. 2. **Formula for Effective Interest Rate (EIR):** For discounted loans: $$EIR = \frac{Discount}{Net Proceeds} \times \frac{360}{Days}$$ For loans with fees and interest: calculate total cost and divide by net proceeds, annualized. 3. **Alternative 1: Discounted Loan** - Quoted annual rate = 6.2% - Loan amount = RM950,000 - Period = 8 months = $$\frac{8}{12} \times 360 = 240$$ days - Discount = $$950,000 \times 0.062 \times \frac{240}{360} = 950,000 \times 0.062 \times \frac{2}{3} = 950,000 \times 0.04133 = 39,266.67$$ - Net proceeds = $$950,000 - 39,266.67 = 910,733.33$$ - EIR = $$\frac{39,266.67}{910,733.33} \times \frac{360}{240} = 0.0431 \times 1.5 = 0.0647 = 6.47\%$$ 4. **Alternative 2: Commercial Paper** - Face value per paper = RM50,000 - Issuance cost per paper = RM3,000 - Number of papers = $$\frac{950,000}{50,000} = 19$$ - Total issuance cost = $$19 \times 3,000 = 57,000$$ - Total proceeds = $$950,000 - 57,000 = 893,000$$ - Interest = $$950,000 \times 0.08 \times \frac{8}{12} = 950,000 \times 0.08 \times 0.6667 = 50,667$$ - Total cost = Interest + Issuance cost = $$50,667 + 57,000 = 107,667$$ - EIR = $$\frac{107,667}{893,000} \times \frac{360}{240} = 0.1205 \times 1.5 = 0.1808 = 18.08\%$$ 5. **Alternative 3: Line of Credit with Commitment Fee** - Credit line = RM1,000,000 - Amount borrowed = RM950,000 - Unused portion = $$1,000,000 - 950,000 = 50,000$$ - Commitment fee = $$50,000 \times 0.03 \times \frac{8}{12} = 50,000 \times 0.03 \times 0.6667 = 1,000$$ - Interest = $$950,000 \times 0.11 \times \frac{8}{12} = 950,000 \times 0.11 \times 0.6667 = 69,667$$ - Total cost = Interest + Commitment fee = $$69,667 + 1,000 = 70,667$$ - Net proceeds = RM950,000 - EIR = $$\frac{70,667}{950,000} \times \frac{360}{240} = 0.0744 \times 1.5 = 0.1116 = 11.16\%$$ 6. **Alternative 4: Revolving Credit Line** - Credit line = RM1,500,000 - Amount borrowed = RM950,000 - Unused portion = $$1,500,000 - 950,000 = 550,000$$ - Commitment fee = $$550,000 \times 0.05 \times \frac{8}{12} = 550,000 \times 0.05 \times 0.6667 = 18,333$$ - Interest = $$950,000 \times 0.07 \times \frac{8}{12} = 950,000 \times 0.07 \times 0.6667 = 44,167$$ - Total cost = Interest + Commitment fee = $$44,167 + 18,333 = 62,500$$ - Net proceeds = RM950,000 - EIR = $$\frac{62,500}{950,000} \times \frac{360}{240} = 0.0658 \times 1.5 = 0.0987 = 9.87\%$$ 7. **Best Alternative:** - Alternative 1: 6.47% - Alternative 2: 18.08% - Alternative 3: 11.16% - Alternative 4: 9.87% The lowest EIR is Alternative 1 (6.47%), so it is the best financing option. 8. **Part b: Two types of non-spontaneous short-term financing:** - **Bank Loans:** Funds borrowed from banks for short periods, usually with interest and fees. - **Commercial Paper:** Unsecured promissory notes issued by companies to raise short-term funds.